Cost benefit curve    Oracle Tips by Burleson Consulting

The Data Warehouse Development Life Cycle

Economic Feasibility

COMPUTING RETURN ON INVESTMENT (ROI)

Regardless of the discounting method, both future costs and future benefits must be expressed in today’s dollars. Ten years ago, President Reagan had a favorite joke about the Russian million-dollar lottery which was paid at the rate of one dollar a year for a million years, and this joke serves to illustrate that a future amount of money can radically change in values depending upon the rate that the money is received. Clearly, a fair economic analysis must express all cashflows must be summed and expressed in present value dollars. Graphically, this involves computing the areas under the cost curve and the benefit curve over the useful life of the data warehouse.

In most cases, a project’s costs and benefits reach a point when cumulative benefits exceed the costs of the project. But this doesn’t mean that every project whose benefits outweigh the cost should be undertaken. Most companies have limited capital resources and can only afford to choose those projects that have the fastest return on investment.

As such, a company will weigh their options and invest in the projects that show the most promise for a fast payback, with an ongoing revenue stream.

However, it is a very common mistake for an organization to rely too heavily on quantitative methods for choosing projects, ignoring intangible benefits which may accrue from investment in a data warehouse. Many intangibles, such as the ability to remain competitive in an aggressive market, are enormously important to a company, even though they cannot be expressed in dollars. It is for this very reason that many data warehouse projects are driven by top management without regard for the costs, simply because it has become a requirement for doing business. Whether the company is a banking institution, a supermarket chain, or a manufacturer, companies in a competitive marketplace are beginning to realize that the proper use of information resources is imperative to the ongoing success of a company.

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This is an excerpt from "High Performance Data Warehousing", copyright 1997.

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