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News In Review

April 27, 1998

ROI In The Real World

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Also, read about these companies and their ROI programs:
Boston Beer Co.

Case Corp.

Elf Atochem

Hilton Hotels

Sears, Roebuck & Co.

Some companies are adopting their own versions of the EVA concept. Retailer Sears, Roebuck & Co., which already measures ROI using net present val ue, has begun asking managers to report what it calls Shareholder Value Added (SVA). This measure "captures the amount of value created or destroyed by subtracting a capital charge from the profits that are generated by a project," explains Gary Crittenden, Sears' executive VP and CFO. "Consistently and rigorously applying this measure ensures that Sears acts in the best long-term interests of its shareholders."

Cookie Cutter
Still, the consensus among business analysts and IT chiefs is that there's no magic formula that can accurately calculate financial payoffs for all IT projects. "Some people expect a cookie-cutter approach to ROI, but it's not like that," says Melendez. "No single method can do everything."

Instead, many IS managers use different ROI measures depending on the complexity, scale, and importance of the IT project in question. For example, Melendez says that analyzing the ROI of migrating an organization's PCs from Microsoft's Office 95 application suite to Offi ce 97 might require only a simple cost/benefits exercise that takes two days' effort. On the other hand, analyzing the ROI for implementing a complete SAP R/3 application suite for the whole enterprise would require more complex methods and could take weeks to do. Also, some projects are complex enough that several ROI metrics, rather than just one, are most effective.

IS managers measure ROI for a wide variety of technology initiatives, according to the InformationWeek Research study. The most common types of initiatives measured are: enterprise applications, cited by 75% of the managers surveyed; hardware purchases and software development, both cited by nearly 60%; outsourcing and networking, both cited by about half the respondents;Internet, intranet, and extranet projects, cited by more than 40%; and enterprise management, cited by more than one-third (see accompanying research ).

Returns for some types of projects can be more difficult to measure th an others. While few managers would question the marketing value of data warehousing systems, for example, quantifying some of the most significant benefits can be tricky.

"A lot of people intuitively understand the benefits, such as enhancing user decision-making and getting users data so they don't miss opportunities or so they can see a problem before it's too late," says Wayne Eckerson, VP of technology services at the Data Warehousing Institute, an industry group in Gaithersburg, Md. "But it's hard to formulate ROI for that."

These intangible benefits of IT projects--which include improved customer service and faster time to market--continue to challenge CIOs. But at some companies, including Sears and Hilton, IS managers are getting closer to measuring these benefits.

View the accompanying research as a PDF file.

Acrobat To view a PDF file,
download the Adobe Acrobat Reader .

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