I taught Financial Management graduate level course at Colorado Technical University (Fall 2012). I decided to create these series of blogs on financial management for Quality Professionals. In many situations quality professionals need to develop an economic case for quality. For example, the quality manager needs to evaluate the effectiveness of the quality system. However, the quality metrics are not expressed in financial terms. Another example is the Manager of Quality needs to manage budgets and calculate the return on investment (ROI) or assets (ROA), and use the language of cost/profitability with senior management. ROI and ROA can be used as a management tool to decide if approval should be given to proceed with a project. After the project is completed, ROI and ROA should be recalculated to quantify the financial impact of the project.
Financial Management for Quality Professionals will include the following blogs:- Blog One: Return-On-Investment (ROI)
- Blog Two: Return-On-Assets (ROA)
- Blog Three: Measuring Cost of Quality (COQ)
- Blog Four: Financial Reporting and important Ratios
- Blog Five: Balanced Scorecards
ROI can be used to measure the benefits of a quality improvement initiative.
ROI = Sum of the Improvement Benefits / Sum of the Costs of the Improvement.
A 20-to-1 ratio means $20 of benefits was derived from every $1 of cost. The example used in this blog is the following scenario:
Manager of Quality is going to lead software automation testing efforts for software applications, including JAVA and Web based software. Before spending significant time and resources on the test automation project, Manager of Quality should be able to identify the importance and likelihood of the test automation success efforts both in financial and technical languages. The focus of this blog will be the financial benefits. Specifically, this case study focuses on calculating the Return-On-Investment (ROI).
ROI = NET INCOME (BENEFIT) / INVESTMENT
Let’s assume we have a total of 25 manual test cases. Other assumptions are summarized in this table:
Simple ROI -
Monetary Savings of Automated Execution vs Manual Execution
The ROI is calculated at 60%. Note that over time this ROI percentage will increase, because the tool costs eventually get replaced in the calculation by tool support costs.
Efficiency ROI -
Time Savings of Test Execution with Automation vs Test Execution without Automation
Definitions
Total # of Test Cases: # of tests to be executed (manual & automated)
Total # of Automated Tests: # of tests slated for automation
# of Executions Per Cycle: Average # of tests executed in each cycle
# of Testing Cycles: # of cycles during ROI evaluation time. A cycle may be a week, a build, release, etc.)
Tester Hourly Rate: The average tester salary
Failure Cost: The predicted cost related failures in production application functionality
Manual Test Execution and Analysis Time: The average time it takes to execute a manual test and analyze the results
Tool and License Cost: Test tool costs
Tool Training Costs : Cost of training resources to use the test tool
Test Machine Cost: Cost of machines used for unattended execution of automated tests (separate from machines used for manual test execution)
Test Development/Debugging Time: Script development time
Automated Test Execution Time: The average time it takes for a single automated test to execute
Automated Test Suite Analysis Time The average time it takes to analyze the results of one full test suite execution
Automated Test Suite Maintenance Time The average time it takes to perform script maintenance following each full test suite execution
Automated Test Suite Analysis Time The average time it takes to analyze the results of one full test suite execution
Overnight Execution? Indicates whether tests are executed during the day, or also overnight
Gain The achieved results of test automation
Investment The cost (money/time) of test automation
Benefit Gain minus the investment
ROI Benefit divided by the investment
Can you tell us how you calculated the gain of $13,200?
ReplyDeleteGain = what would the cost be for manually testing the 10 cases that will be automated?
ReplyDeleteSaid another way, gain is the cost of manual test execution that will no longer exist once the set of 10 tests has been automated:
# Of Execution per Cycle X # Automated test cases X Manual Test Execution Time X Tester Hourly Rate = 3 Executions X 10 Test Cases X 8 hrs. X $55 = 13, 200
Thank you,
Arta