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Hitting the mark with your Transformation Roadmap Cost Estimates

As the phrase goes “Success doesn’t just happen. It’s planned for”; a key component for the successful implementation of a transformation roadmap is the roadmap cost estimate. Getting your roadmap cost estimate on the mark is as much an art as science.

Organisations typically go through a Target Operating Model (TOM) design process when they need to transform their operating model to meet their growth ambitions or adapt to changes in their business environment. At the end of a Target Operating Model design assignment, the output is a roadmap with a cost estimate to implement the TOM design.

The implementation roadmap consists of multiple initiatives to be executed within a timeframe to achieve the Target Operating Model. In a typical cost estimation exercise, a cost estimate is assigned to each individual initiative. The cost estimate of an initiative may consist of the following costs over the timespan of the initiative:

  • Internal resource costs
  • External support costs (consultants / contractors)
  • Vendor implementation / licensing costs
  • Service provider implementation / licensing costs

Individual initiative cost estimates are summed up to get an overall cost estimate for the roadmap, which is compared against the business benefits and cost savings attributable to the TOM design. Typically, a contingency factor is also added on top of the total cost estimate to cover for project uncertainties / unexpected delays.

Why an accurate roadmap cost estimate is important?

Given the strategic importance and significant investment associated with implementing a TOM roadmap, accuracy of cost estimates is paramount for the following reasons:

1. Understanding “Bang for the Buck”: A transformation roadmap is only successful if it has been planned realistically, keeping in mind associated costs. An accurate roadmap cost estimate ensures that project stakeholders clearly understand the investments required for the transformation to be a success.

2. Understanding the impact of initiative prioritisation: Accurate cost estimates ensure that when individual initiatives are prioritised or de-prioritised based on business needs, the impact on planned project costs is well understood.

3. Key input for business case: A roadmap cost estimate is a critical input for developing the business case. A business case clearly outlining the cost/benefit analysis of the investments required increases chances of Board approval. Over-estimating transformation costs can lead to unrealistic budgets and reduced chances of Board approval. Similarly, under-estimating transformation costs may increase chances of Board approval but can lead to some transformation program benefits not being realised, or running significantly over ‘budget’.

4. Provides insights: A roadmap cost estimate provides insights about projected costs and clearly outlines benefits. The cost estimate also provides an understanding of the Total Cost of Operation (TCO) of each roadmap initiative and helps in avoiding regrettable spend. Cost estimates also help in understanding both transition and steady state costs.

5. Option to discuss alternatives: The cost estimation process helps in identifying project risks such as unforeseeable costs, resourcing constraints etc. Accurate cost estimates help in the cost/benefit analysis of the various roadmap options; leading to the selection of the optimal roadmap.

6. Tracking Progress and Outcomes: An accurate roadmap cost estimate forces the program team to remain on track – as their progress and cost overruns are tracked. This is particularly helpful in managing vendor implementations and service provider outsourcing arrangements.

Common Pitfalls to Avoid

While fundamentally important, roadmap cost estimates are also inherently complex and difficult to estimate. Steps that can be undertaken to improve the outcome of roadmap cost estimation include:

1. Avoiding a one size fits all approach: The roadmap cost estimate consists of costing a variety of individual initiatives across the functional, organisational and technology landscape. Each initiative cost may depend upon detailed assumptions related to resourcing headcount, requirement for specialist external support, annual licensing fee range, expected vendor discounting, etc. We should avoid a one size fits all approach for costing separate initiatives as their underlying cost-drivers could be fundamentally different. The key is to detail your assumptions to the right level ensuring the cost estimate is within the acceptable level of accuracy.

2. Forgetting program stand up and mobilisation (pre-implementation) costs: A common mistake in roadmap cost estimation is simply estimating an overall dollar amount for program stand up and mobilisation. Detailed cost estimation of specifics of program stand up and mobilisation initiatives helps in the accuracy of the overall program cost estimate and assist in setting up the TOM implementation for success.

3. Underestimating external support costs: When implementing the transformation roadmap, many organisations tend to the underestimate the role of specialist external consultants. As they progress along the roadmap, organisations end up bringing external specialists on board resulting in inflated program cost. During the cost estimation process it is important to realistically assess an organisations internal program execution capability and expertise, and the requirement for specialist external consultants.

4. Using generic vendor / service provider costs: In today’s market most vendor / service provider costs are negotiable based on the AUM, geographic location, type of funds, number of customers etc. of the asset owner / manager. During the cost estimation process (before the vendor / service provider selection process), one should use an annual licensing and vendor implementation rate specific to the organisation rather than generic vendor / service provider costs.

5. Overestimating AUM growth: Net benefit is a key metric for defining the success of a transformation roadmap. Sometimes organisations tend to assume unrealistic AUM growth to justify the cost of a transformation roadmap (net benefit). This should be avoided, and AUM growth projections should be based on realistic business assumptions.

6. Avoiding indiscriminate use of contingency factor: Adding a contingency factor indiscriminately to a cost model reduces the accuracy of the cost estimate. Contingency factors should be avoided for costs and scheduled times that have a low risk of overruns. However, when one is not sure of accuracy of a cost estimate, an appropriate contingency amount should then be included in the cost model.

How Shoreline can help?

Shoreline has extensive experience in Target Operating Model (TOM) design and undertaking cost estimates for transformation roadmaps for asset managers and asset owners in the Asia Pacific region. Leveraging our operating model framework and proprietary cost estimation accelerators has enabled our diverse client base of large public sector asset owners, major superannuation/pension funds, and niche and large regional asset managers, deliver successful business transformation programs.

For more information, please contact us.

Parikshat Chhaila
Managing Consultant

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