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Getting Tough On ROI


Companies are taking a hard look at returns on IT investments, using complex valuation models linked to business goals.

By Eileen Colkin
InformationWeek
October 21, 2002 12:00 AM (From the October 21, 2002 issue)

Tough competition and even tighter budgets mean that IT projects must go through a rigorous ROI wringer. And that wringer is getting tougher all the time. Forget on time and on budget, and don't even think about using a vendor's ROI tool. The smartest companies are measuring a complex mix of business objectives, costs, and risks, and holding managers accountable for results that maximize returns.

"It used to be the 'ta-da' strategy," says John Howell, VP and program director of Internet solutions for Citibank Global Securities Services. "We'd put the project together and throw it out there and say, 'Ta-da! It must be successful.' We didn't look to maximize ROI, we looked to measure it."

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John Howell -- Photo by Rachelle Mozman

Citibank Global Securities Services has moved beyond the easy approach to ROI with a methodology that looks to maximize returns, Howell says.
The new frontier is "more acuity in computing ROI," says Howard Rubin, a principal at Meta Group. Companies categorize IT initiatives by specific goals, such as raising the stock price, increasing market share, or lowering operating costs, then use historical and other data to quantify what returns can be expected. "IT departments need to look at the big picture," says Calvin Braunstein, president and executive research director at advisory firm Robert Frances Group. They're also tightening the links between IT investment and its impact on a company's sales and profit. Spending should go up only when revenue is headed in the same direction or costs are going down. "It has to impact either the top or bottom line," Braunstein says.

Still, only a few companies are using broader definitions of ROI. About 8% of all businesses examine IT investments through these more complex valuation filters, Rubin says. And those that are doing so use a variety of methodologies.

Chris Lofgren, president and CEO of Schneider National Inc., a $2.4 billion-a-year trucking and logistics company, has embraced the move to a more complex approach to ROI. "The emergence of the ROI metrics came from a realization in the tech community that sometimes they built things that were neat and cool because they could, even though there wasn't much value," Lofgren says. "Now there's an evolution to the extent that if companies want to push capital into a technology, IT has got to compete for that capital with proven valuation."

Chris Lofgren -- Photo by Bob Stefko

Project valuation has become more of an art than a science at Schneider National, president and CEO Lofgren says.
Lofgren puts IT investments into strategic buckets. Those that will lower costs go in one bucket, revenue creators in another, and those expected to simplify business processes in a third. He then considers different factors for each category, consulting the executives and business units relevant to each set of projects. But these sorts of valuations are still more of an art than a science. "You can't take away judgment, business strategy, and insight," Lofgren says.

Citibank Global Securities has made the transition away from the "ta-da" strategy to a more comprehensive approach to assessing the potential returns on IT projects. The company, which sells stocks and bonds to institutional investors, is building an executive portal that will let it act as a central information source and value-added service provider for C-level executives at the 350 largest financial institutions in the world. Having such a small target market leaves little room for error. One lost customer for the division is equivalent to a global retailer losing a million consumers. But the potential for gains is also huge: If the portal wins favor, Citibank's market share should increase, and it will be positioned to sell other products to this elite group, Howell says.

Howell's group built a valuation model that examined every aspect of the business to determine the best strategy for developing, implementing, and selling the portal, working with people in various lines of business to ensure that each step of the project would succeed. The goal wasn't just to come up with an ROI calculation on the project, but to design a game plan for the highest degree of success.

The biggest success factors were price and client adoption, Howell says. And Citibank wanted to get it right the first time. If it charged too little initially, customers might balk later at a price hike. But charging too much could put off potential customers. "The strategy we took was to ensure we could get the most value out of the client, maximize the money, and minimize how much we left on the table," he says.


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