Getting Tough On ROI

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

InformationWeek Staff, Contributor

October 18, 2002

4 Min Read

Schneider, too, relies heavily on past experience in its ROI assessments. A few years ago, the company launched an initiative to automate the selection of large dedicated truck fleets for customers, expecting that this would help it win more big deals. Schneider implemented a prototype for one customer but realized the project was failing because the trucking company's internal sales and technology operations people weren't communicating with each other. "The project was technically very good, but there were issues stopping it from working," Lofgren says. "So rather than damage a customer relationship, we pulled the plug."

Schneider is revisiting that project, but this time with the help of hindsight. Training for sales and tech employees is figured into the ROI equation, along with other factors such as maintaining a system after it's created. "A project will create a cost burden throughout its existence," Lofgren says. "That's a cost that has to create an annuity of benefit."

Valuation models involve managing projects to ensure that they're on time, on scope, and creating the anticipated value, as much as setting up metrics for returns beforehand, Meta's Rubin says. "Historically, if a project slipped, someone would ask for more time and budget. Now if it slips, you go back to the business case." If it's not meeting the goals, then it's canceled. Companies that follow this practice generally shed 40% of their projects, Rubin says. What's more, if projects are costly to maintain once implemented, they may be disrupting strategic goals and need to be re-evaluated.

Two years ago, when PeopleSoft Inc. CEO Craig Conway told CIO David Thompson to help cut $100 million in expenses for the company, Thompson launched an effort to justify the IT projects he had under way. He worked with the software company's business units to revisit old projects and track the returns they were generating. "People put together ROI savings [projections], but nobody follows through and says, 'We never achieved the goals' or holds people accountable," Thompson says.

PeopleSoft built a Web-based application (which it plans to start selling next month) that ties project portfolio management into other applications, such as human resources and finance. A project entered into the system gets input from across the company on what it will cost each business unit and how each will benefit. The investigation extends to issues such as time spent changing processes or creating and learning new ones and effects on employee productivity. Once launched, PeopleSoft can monitor a project in real time. Thompson can tell to the penny where his budget is going and who in the company is benefiting. Daily budget reports show how effective the projections are, Thompson says. "We don't have to wait for a project milestone to come around and get blindsided by it. We can take corrective action immediately."

PeopleSoft and iValue aren't alone in offering valuation tools. Among others available: Hubbard Decision Research borrows from management science, game theory, and economic equations to assess potential risks and returns of an IT investment. Enamics Inc. provides software and services for aligning IT and business goals. It plans next month to roll out a new version of its offerings that includes project portfolio management. ProSight Inc., a maker of project portfolio-management software, introduced an upgrade earlier this month that measures IT investments against business goals. IT advisory firm Gartner this summer began selling a consulting service that measures the business benefits of IT.

Of course, changing how projects are evaluated requires a change in executives' thinking, which isn't easy. "We run into a lot of resistance because there's a power shift involved," iValue's Gardner says. "Executives don't have the level of discretion they had in the past, where they could get approval and shape a project's direction. They're more constrained by facts that now enter the discussion."

IT departments should brace for new, increasingly tough demands for rigorous ROI testing of projects. While the up-front work required to get projects and purchases approved will increase, the success factor should increase as well, as IT dollars get spent more wisely.

— with Mary Hayes

Photo of Tim Buckley by Bill Cramer
Photo of John Howell by Rachelle Mozman
Photo of Chris Lofgren by Bob Stefko

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