ROI In The Real World

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April 27, 1998

ROI In The Real World

continued...page 2 of 5

Also, read about these companies and their ROI programs:

Boston Beer Co.

Case Corp.

Elf Atochem

Hilton Hotels

Sears, Roebuck & Co.

Still, some IT chiefs say formal ROI models are usually not needed. "We don't do a whole lot of that," says Bernie Schumacher, VP and CIO at Block Drug Co. in Jersey City, N.J. For these executives, "gut feel" is still good enough.

But the ranks of business leaders who want ROI measures are growing--especially those who want ROI measures for major, companywide endeavors such as enterprise resource planning. "In areas where we may not have the same level of understanding about the benefits [as IS executives], and where there are a lot of unknowns, we need to be vigilant in measuring returns," says Dieter Huckestein, hotel-division president at Hilton Hotels Corp. in Beverly Hills, Calif. "It's a shock when you buy these systems, then see how many consultants you need to integrate them."

Huckestein is typical of top executives who want their IT investments to either boost or create shareholder value. "We understand that enhancing systems is critical in today's world, particularly for a global company," he says. "But we look at every system we get to make sure there's a payback."

About half the IS executives in this year's Infor mationWeek Research survey say strains on their budgets from year 2000 conversions, higher salaries due to the labor shortage, and other factors are fueling demand for payback measurements. "Year 2000 is soaking up money from other resources, and this is creating much more pressure from above for better information technology ROI," says Stan Goldman, president of Technology and Business Integrators Inc., an IT consulting firm in Woodcliff Lake, N.J.

Among the available choices of metrics, the most popular is a traditional cost/benefit analysis. It's used by 97% of the respondents in the InformationWeek Research survey (see accompanying research ). Others include net present value, used by 44% of respondents; weighted scoring methods, used by 22%; and applied information economics, used by 12%.

It's not surprising that the cost/ benefit model is the most popular. Financial experts say it's probably the easiest to calculate and understand. And a huge majority of managers say it's the metric most likely to measure IT benefits successfully.

One metric that's gaining popularity for measuring IT returns is known as Economic Value Added (EVA). Developed by Stern Stewart & Co., a management consulting firm in New York, it measures the difference of after-tax operating profit minus the cost of capital employed in generating the profit. "It considers the fact that equity has a cost," says Glomark's Melendez. "Other measures don't."

View the accompanying research as a PDF file.