InformationWeek

April 27, 1998

ROI In The Real World

continued...page 4 of 5

Also, read about these companies and their ROI programs:

Boston Beer Co.

Case Corp.

Elf Atochem

Hilton Hotels

Sears, Roebuck & Co.

Some managers say doing financial payback analyses is challenging for any kind of IT investment. "It's hard for companies to put in these metrics, " says Jim Matteoni, executive VP and CIO at UMB Financial Corp., a multibank holding company in Kansas City, Mo. "For them to really work, you need a strong financial arm that defines the standards for measurement."

Measurements for some types of investments could get even more complex, thanks to a new accounting rule recently published by the American Institute of Certified Public Accountants and approved by the Financial Accounting Standards Board to go into effect on Dec. 15. Under the new rule, companies will be required to treat software bought or developed for internal use as an asset on their balance sheets.

Until now, companies have been free to choose whether to record software costs as expenses as they are incurred, or to capitalize the costs as an asset that is then depreciated over the software's useful life. The new rule could make CEOs and business managers more willing to approve big IT projects, because the investment will be spread over a number of years. But the change cou ld also force CIOs to more carefully consider the long-term value of major software projects or purchases.

Gradual Clearing
The new accounting rules could also make ROI analyses more confusing. "This is one of those things we should leave to the financial organization to figure out," says Greg Buoncontri, VP of IT and CIO at Novartis Pharmaceuticals Corp. in East Hanover, N.J. "Obviously it becomes your issue when the resulting change takes your project and makes it the most fabulous return they've ever had, or the worst return they've ever had. But those kinds of accounting things don't generally make or break a project."

But some IT chiefs applaud the accounting-rules change, saying it will help them justify the cost of projects that involve big software investments. "It makes sense to me that software be capitalized, because the return on software investments generally occurs over a period of time," says James Kinney, VP and CIO at Kraft Foods Inc. in New York. "Also, software has maintenance associated with it, so it's no different than any other capital investment."

For some IT executives, none of these developments are terribly convincing. "We do some crude calculations of [investments and returns], but mostly it's a gut feel that the project will be good for business," says Schumacher of Block Drug. "We're not at all frivolous when it comes to IT spending, but we don't stand on formality."

More Than 'Gut'
IS managers who eschew formal ROI measures do so for a variety of reasons. In the InformationWeek Research survey, of those managers who say their companies don't practice formal ROI, nearly 60% say they prefer informal payback estimates (see accompanying research ). Forty percent of the same group say their organization doesn't require formal ROI measures at all; nearly 15% say they're dissatisfied with available metrics; and 10% indicate they're too busy with other work to measure ROI. Despite the growing pr essures to show returns, only about one-fifth of these IS managers plan to adopt any type of formal ROI measure in the next 12 months.

View the accompanying research as a PDF file.