InformationWeek
Defining The Business Value Of Technology
August 24, 1998
What's Your ROI?
Tools and services can help calculate, quantify IT's effect, but none are perfectBy Jeff Sweat
ost IT organizations are required to justify expenditures by showing a return on investment, but few have figured out how to do it. Several vendors have introduced products and services to measure IT ROI, but so far, none provides the perfect calculation.The problem in calculating ROI is that IT is inextricably linked to all facets of a business. It's difficult to separate the return on an IT investment from the return on other investments. For example, are higher customer-service ratings due to the call center that was just installed or to the extensive training that reps received in the last six months? It's nearly impossible to say in this case and many others.
"It's difficult to show just an IT return on investment. There is hardly ever an IT project that's isolated from the business," says Don Lee, VP of IS at power tool maker Black & Decker Corp.
IT chiefs find that traditional ROI accounting methods--which look at the cost of an investment relative to revenue generated--are meaningless. They count only a fraction of IT's contribution because many IT benefits aren't quantifiable in a traditional sense, or the return comes in metrics other than dollars. "Pure ROI numbers are a small percentage of the measurement," says Mike May, VP of IT for Teknion Furniture Systems in Downsview, Ontario. Far more significant for the office-furniture company are measures that determine how much IT investments contribute to cutting the turnaround time for filling orders, the customer-payment cycle, and the number of goods returned.
With the requirement to justify IT spending stronger than ever--more than 80% of the IT executives polled recently by InformationWeek Research face such a requirement--top managers are turning to a variety of tools and services to help quantify IT's effects. "So many companies don't know where to start," says Bruce Guptill, research director at Gartner Group Inc., which has its own ROI service, called ROIT (for Return On IT). "They're looking for tools or formulas."
Several firms have methodologies and services that make it quicker and simpler for IT to assess the value of projects and investments. All require extensive subjective input from IT.
For example, Gartner Group's ROIT research program uses research, consultation, strategic analysis, and executive briefings to help companies decide for themselves which IT initiatives are most in line with their business strategies, and in the process come up with metrics for judging future projects against.
While many consulting firms produce this sort of grab bag of results, some groups are working on making results more easily understood. The Concours Group, a management consulting firm, this month rolled out CEO/CIO Dashboard, an IT organization-measurement service that it says is a communications device between CIOs and their bosses.
Concours consultants help customers with a self-examination that looks at six aspects of IT operations: employees, internal operations, financials, innovation and learning, customer value, and the value of IT investments. For existing infrastructure, the service looks at the cost per unit, such as the cost of an E-mail system per user.
For new systems, CEO/CIO Dashboard measures the economic value-add of the project on the business--the difference between after-tax operating profit and the cost of capital used to generate that profit. Then it looks at the cost of the IT portion as a percentage of the total cost. That ratio, Concours says, shows the percentage of value that can be attributed directly to IT. For example, if a new call center produces a return of $10 million and IT accounted for half of its cost, then the IT return is $5 million.
CEO/CIO Dashboard provides hard ROI numbers to assure IT executives that they're doing their baseline business effectively and investing appropriately, says Concours research director Eileen Birge.
For paper manufacturer Georgia-Pacific Corp., which helped Concours develop the system along with 35 other companies, the service is most useful in the nonfinancial, nonoperational measures it provides. "It broadens the scope of what you're measuring," says Chuck Williams, VP of IS. "It's putting more instruments on the panel."
CEO/CIO Dashboard convinced Williams to submit internal customer satisfaction, employee satisfaction, and alignment of IT with strategic business as metrics for the company's next round of budgets. "This may simplify the discussion of what we're spending on IT and whether we needed to do it with IT or something else," Williams says.
Benchmarking Partners maintains that technology ROI can be quantified. The research firm, which deals primarily with return on enterprise application and decision-support packages, draws from four years of ROI research across multiple industries for its ROI Business Case Methodology. Benchmarking Partners provides numbers from comparable organizations to calculate an IT investment's potential ROI--a process that takes from two days to 10 weeks, depending on how prepared an company is and how much detail it wants.
ERP First
Although users say there is a pressing need for IT measurement tools, few such tools exist. The first ones have appeared in enterprise resource planning applications, the area where IT executives most often have to justify investments, according to InformationWeek Research.
PeopleSoft Inc. offers a combination of software and services aimed at justifying an application purchase, guiding deployment, and evaluating the completed implementation. It provides ROI calculation help that can be customized relatively easily.
For Hitachi Computer Products America, PeopleSoft's Strategic Investment Model cut the information gathering and calculation time from weeks to days, says Marty Jamieson, division controller for the Norman, Okla., company. "If they would have marketed it a few years ago, I would have bought it," he adds.
Supply-chain vendors i2 Technologies Inc. and Manugistics Inc. have similar services. i2's Supply Chain Opportunity Assessment service is used primarily in the sales cycle to help IT executives justify purchase of i2's supply-chain software to senior executives and to determine which modules will be most beneficial to implement first.
Silicon Graphics Inc. used the service to justify buying i2, which it will have running next month. "We went from a bunch of people who are very skeptical to a bunch who can see a path," says David Fink, manager of supply-chain planning for Silicon Graphics.
Microsoft also entered the ROI tools market, providing its IT Advisor free on its Web site (www.microsoft.com/enterprise/building/advisor/advisor_home.htm). IT Advisor asks IT managers a series of questions about their infrastructure and systems, and then tallies the answers in a way that reveals how effective their IT infrastructure and investments are and alerts managers to possible holes.
IT Advisor's approach--assigning values to qualitative answers--is similar to one developed by Johns Hopkins University's IT unit in conjunction with consulting firm the Potomac Group during 12 years of ROI measurement attempts, says Arthur Heigl, administrative computing director. The result, he says, is a tool that can give users a clear picture of IT investments with an almost quantitative look at inherently qualitative factors.
ROI tools are in the early stages of development, and many IT executives don't trust them. "You would have to consider those tools with some level of skepticism," says Black & Decker's Lee. "There's a commitment you're going to have to deliver, so you'd better be comfortable with the tool you're using."
For now, there's no tool or service that magically computes ROI. The ones that are available are subjective, requiring managers to evaluate their own systems. In the end, an IT project's chances of getting the investment needed hinges on a mix of hard numbers showing a clear ROI and on softer measures. "Users determine and justify projects," says Grace Martinez, CIO of El Paso Energy Corp. in Houston, "depending on how much they want them."
Illustration by Gary Eldridge/SIS
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