Traditional methods for estimating business benefits of MDM (part seven)
As it was well explained by David Linthicum, building a business case begins with the definition of the problem domain. The drivers outlined in the previous section define most common high-level problem domains for MDM.
If your ROI and NPV estimates require a more detailed list of problem domains and processes, you can benefit from a number of articles where a variety of benefits achieved through improved data quality and improved management of master data are discussed. For example, see:
- Nathan Jones: “20 Reasons for Data Quality in Charts of Accounts and Internal Organisation”
- Henrik Liliendahl Sørensen: “55 Reasons to Improve Data Quality”
- Rob Karel, Forrester Research Inc., October 29, 2008: The ROI from Master Data Management
- Andrew Africa: “Rely on Data Quality to Survive”
- Nitin Joshi: “Quantifying Business Value in Master Data Management”
- Dylan Jones: “Using Metrics to Assert a Business Case for Data Quality”
Let’s consider a simple business case scenario where an enterprise intends to implement MDM because their current process heavily relies on a third party supplier of customer data. The enterprise pays this supplier $4M annually.
In addition to being on a continuous outward cash flow due to the third party fees, the enterprise suffers from a lack of agility to support changing business requirements. The enterprise decides to implement an MDM solution and discontinue the subscription to the third party data.
The initial implementation cost, which includes the MDM software license cost, integration services, acquisition of new hardware, training and other initial expenses, is estimated at $3M. On completion of the MDM implementation the total annual expense is estimated at $400k, which may include the annual software license fee, cost of data stewardship resources, maintenance and other ongoing costs.
In this example, in a year after implementation, the enterprise will spend $3.4M on MDM. Since the third party data subscription is canceled, $4M was not spent, which results in the total of $0.6M cost savings in the first year.
Every consequent year will provide an additional $3.4M savings. Five years after implementation, $20M will be saved on the $5M total invested, which results in (20-5)/5*100% = 300% ROI over five years and $15M Net Present value (NPV).
Even though we didn’t put a dollar tag on the agility to support changing business needs, we identified the inefficiency ($4M annually) and found a way to eliminate it by making a profitable investment in MDM products and services.
In this example, the problem domain was very well defined and the ROI model was simple. Unfortunately, these simple ROI scenarios for MDM are limited.
Next week, I’ll investigate a more complex example.