InformationWeek

April 27, 1998

ROI In The Real World

The days of "gut feel" justification are ending. Measuring IT's value is more vital than ever, finds a new InformationWeek Research

By Bob Violino

Also, read about these companies and their ROI programs:

Boston Beer Co.

Case Corp.

Elf Atochem

Hilton Hotels

Sears, Roebuck & Co.

till think there's no need to calculate the return on investment for your major IT projects? Get ready for a seismic shift: A growing number of IS executives say clearly defined financial planning for IT-based projects is becoming their standard operating procedure. With only a few exceptions, the days of "gut feel" justification for multimillion-dollar projects are winding down.

Why the change now? Blame it on the budget. CEOs and corporate boards have regularly been exposed to costly year 2000 efforts and an IT labor shortage that's driving salaries sky-high. The result: They're more keenly aware than ever of where IT dollars are going--and they're demanding formal payback measures for IT projects that in the past escaped such scrutiny.

"With any new development project--whether it's for cost savings, new p roduct development, marketing--we must forecast returns," says Gary Rautenstrauch, executive VP of distribution and functional CIO at Baker & Taylor Inc., a Charlotte, N.C., distributor of books, videos, and software. "It has become so easy to spend a lot of money on hardware, software, and maintenance--and not necessarily see any returns."

Not anymore. Business leaders, IS executives, consultants, and academics for years have debated whether it's necessary or even desirable to measure IT's return on investment. But that discussion is being cut short by CEOs and chief financial officers with their eyes on the balance sheet. Before granting funds for a major project, these execs are demanding to see the expected payback--and in financial terms they understand.

An InformationWeek Research survey shows that's a lot more than just talk. More than 80% of the 150 IS executives at U.S. companies surveyed in January say their organizations require them to demonstrate the potential revenue, pa yback, or budget impact of their IT projects (see accompanying research ). To get the full measure of how quickly this practice is growing, consider that in a similar survey conducted just one year ago, ROI was required of only 45% of those surveyed.

The demands are being heard. Of the IS executives surveyed this year, slightly more than half say they use some type of formal ROI metric for their IT projects. In the year-ago survey, formal ROI measures were used by only one-fifth of the respondents. Today, the companies embarking on these ROI programs include Boston Beer, Case, Elf Atochem, Hilton Hotels, and Sears.

At these and other companies, "CIOs want to keep their jobs longer, and they're learning that they need to take a more business-oriented approach," says Ruben Melendez, president of Glomark Group Inc., a Columbus, Ohio, consulting firm. "All of the ROI methods form the heart of making sure that IT is aligned with business."

View th e accompanying research as a PDF file.