Selling Your Programs Developing an ROI Wayne McBrian – Brookstone Dom Zuccala – Borders Group Inc.

Objectives Identify potential uses for the ROI analysis Build Partnerships to Support Projects Definitions and gathering information Example of a capital ROI model Using the ROI model for non-capitalized projects

Selling Your Programs Developing an ROI Define your profit improvement objective. –Improve sales Reduce Returns Improve Profit Margin –Reduction in operating expense Reduction in Payroll Reduce equipment cost or services purchased What is the true cost and benefit from your project?

Selling Your Programs Developing an ROI Benchmark your objective –Many control procedures or equipment are used today. –Contact your peers in the industry for feedback. –Review studies like the National Retail Security Survey from the University of Florida by Dr. Richard Hollinger.* If your proposal is something new you start from the bottom by defining what elements you need to achieve success. * We make reference to Dr. Hollinger’s 2004 Survey during this presentation

Selling Your Programs Developing an ROI Examples where you might develop an ROI for known Capital Improvement. –Burglar Alarms used by 95% of retailers –Non discrete CCTV used by 92% –Digital Video Recording used by 78% –Armored Car used by 66% –Check Approval Database used by 59% –POS Data Mining Software used by 55%

Selling Your Programs Developing an ROI Examples where you might need a bottoms up ROI for a capital project. –CCTV Interfaced with Exception Reporting used by 29% –Timed Entry Safes used by 15% –Vendor Source Tagging used by 8% –RFID used by 6%

Selling Your Programs Developing an ROI Examples of a non-capital project where you might develop an ROI or other financial justification. –Refund Control used by 89% –Void Control used by 86% –Employment Verification used by 75% –Criminal Conviction Checks used by 56%

Selling Your Programs Developing an ROI Examples of non-capital programs where you might develop a bottoms up ROI or financial justification. –Mutual Protection Association used by 33% of Retailers –CD Rom / Internet Training used by 22% –Web Based Communications used by 30% –Pay Check Stuffers used by 29%

Selling Your Programs Developing an ROI Obtain Field Support for your Project –Reduce Loss and save Sales Get Finance involved –Partnership to improve profits –Obtain goals necessary for funding 12 or 24 months for ROI

Selling Your Programs Developing an ROI Develop a pilot / test criteria and prove assumptions. –What were the pre-pilot conditions? –Measure as much as possible SalesReturnsShrink VoidsPayrollOther Expense Enter your results in an ROI Model.

Return On Investment Model

Return On Investment Model - Components Header Information Profit and Loss Calculation Assumptions Summary

Definitions

Return On Investment - Header Division: Home Office, Stores, Distribution Centers Project Name:Summary Name (Core Merch Systems) or Activity ID (07-04ITS-3600) Asset Useful Life:Estimated Life that the resulting assets of the project will be in Production Location/Accounting Unit: Home office Data Center, Park Avenue Store, #200, or Project Start Date:Estimated physical launch date of project if approved Project Completion Date(s): Dates Hardware is put into use, date software program and modifications are put into production Capital Project Cost: Projected cost of all asset components – hardware, software, development modification and roll-out costs Expense Project Cost: Projected cost of all expenditures that are not capitalizable – Pre-project planning hours, employee travel, training, contracted maintenance charges Write Off:Hardwares or softwares that will be taken out of service when this project is put into production. ($500,000 server purchased 3 years ago will have $200,000 of undepreciated net book value “NBV” remaining) This cost of taking an asset out of service in advance of it’s initially estimated useful life is a cost of the replacement project

Profit and Loss Impact Line Definitions P&L Impact:All projects have an impact on the income statement, during the project and once it is completed Annual Sales Increase Sales will be affected for many projects that are rolled out to the stores. This is more often impacted by marketing campaigns and fixture roll-outs, but also by program rollouts and enhancements. Margin Increase – Input Margin Rate Increased sales also have additional cost of product sold. We have defined margin rates (sales price in excess of product purchase price) for store categories and departments, and a store-wide margin rate Disposal ExpenseThe NBV of assets to be written off plus the actual cost to dispose/sell the assets – shipping & freight, hazardous materials charge, seller’s commissions Payroll AdjustmentCost of the projected number of positions to be added or eliminated from the efficiencies of the completed project. Not a scenario where the project will free up 5 hours/week of staffer’s time. Projects may also lead to an increase in payroll Expense Reduction Eliminated maintenance costs both contracted and “time & material” repairs, reduced consumables such as paper used in producing a current report, utilities reductions such as data line charges or electrical use Depreciation Reduction from disposals Using the “Write Off” example above, the $500K server would have 2 more years of $8,333 monthly depreciation (cost divided by the useful life) removed from expense with the disposal of that asset Annual Maintenance / Support costsOr expense increases. Contracted maintenance or support fees for the new software or hardware. Increased consumables or utilities.

Return On Investment Model Assumptions For a Capital EAS ROI Assumptions: Capital equipment expense of $13,500 Assumed 20,000 Tags per year at cost of.04 per unit. Assumed 166 hours. Per 9.00 per hour and 3% payroll increase per year. 15 Seconds per unit. Expense reduction of 30% shrink in year one. Incremental 20% year 2-5. Sales increase based on.5% reduction in returns for EAS stores. Maintenance expense of $1,000 in years 3-5.

Return On Investment – Header Capital Example

Return On Investment Model ROI Calculation Convert retail sales to cost

Return On Investment Model ROI Calculation Expense expressed as ( )

Return On Investment Model Projected Cash Flow

Return On Investment Model Putting It All Together

Return On Investment Process Control - Check ID

Return On Investment Model Assumptions – Process Control Assumptions: 1) $1,000,000 store with $35.00 sales per transaction - 28,571 transactions 2) Refund rate 7% - avg. return per transaction $ ,000 transactions per year. 3)15 seconds per transaction to execute check. Estimated 8.8 hours per year. 4)Assumed reduction of 1 return transaction per week.

Return On Investment Model ROI Calculation – Process Control

400 store chain = $206, per year

Selling Your Programs Developing an ROI-Summary Define your objective Implement your program Monitor your project Measure your success Present your ROI Model