ROI: The IT Department's Moving Target

Return on investment is more about process and the breadth of evaluation parameters than it is about specific tools and technologies. Pick the performance metrics that make the most sense for your project and business goals.

InformationWeek Staff, Contributor

August 2, 2001

9 Min Read

In business, if you stand still, you lose ground. If you don't improve--at least at a marginal rate--you probably aren't even maintaining the current level of productivity and profitability.

There's a growing mandate for companies to come up with new and innovative ways to improve business practices and to bring policies more closely in line with goals. IT often supplies the enabling technologies that implement and automate these policies.

For an IT manager, this means coming up with the tools that will help the business and its employees get, retain, and better service customers. Given the current economic climate, that means deploying systems that have a demonstrable impact on these business goals: increasing revenue and decreasing costs.

To gauge how well a proposed IT project will meet these somewhat hard-to-quantify goals, as well as apply some financial vigor to the process of divining how a project will affect the bottom line, many advocate running a projected return-on-investment calculation. ROI can be a useful tool to ensure that only profitable IT projects are approved.

Vlad Rom, a consultant at customer-relationship management consulting firm Extraprise Inc., has developed three different ROI metrics for customers. Two were created by laboriously building spreadsheets, and one was based on a commercial product called ROInow from CIOview Corp.

For a large Chicago financial-services company, Rom put together a spreadsheet. Most of the work involved doing a business-process inventory and assigning costs to all of the items in the inventory. "For this or any other organization, you really need to understand the specific business and the way that they operate," Rom says. "Many companies expect a full-blown business-process analysis during the course of an ROI project."

For Rom's latest job--the evaluation of a call-enter project for a retirement-benefits service company in Chicago--he used ROInow. Rom and his firm's call-center specialist tried to determine the efficiencies they could get from Cisco Systems' Intelligent Contact Management package. They used the software's built-in, customizable methodology to analyze processes and break down and interpret the data, working with IT people who understood the call data that they derived from the Cisco switch.

"Any ROI calculation is a moving target as you attempt to refine what the impact of changes are," Rom says. "The variable costs begin to settle into something that's much more concrete, and it becomes a very iterative process."

Key Profitability Metrics

Determining the ROI of a project begins with the complex practical issues of assigning costs and benefits to an action or project over time in monetary terms. The area where most folks are likely to get into trouble is in defining and quantifying real business benefits. In particular, it can be difficult, though not impossible, to establish cause-and-effect linkages between software functions and related business benefits.

"When you have a focused strategy on how you want to use the ROI tool, in concert with good data and good process management, you start to find that the ROI can come very close to meeting your expectations," says Jonathan Poe, a Meta Group VP.

There are several useful methods for assessing the financial costs and benefits of a project. ROI is one, but three other measures bear mentioning: internal rate of return, net present value, and payback period.

Internal rate of return is an estimated measure that reflects the potential profits resulting from the completion of a project. Net present value is the value of a project and the sum of the cost of the initial investment added to the expected future value or revenue. Payback period refers to the time it will take to recoup the project investment from savings achieved in other areas.

All of these financial tools are closely tied to the goal of helping mere mortals figure out if they're making the right decision in terms of investing in a product or service. While ROI is commonly used as a collective term that could well include all of these concepts, it's more precisely used as a means of quantifying and aggregating the costs and benefits of a project and arriving at some sense of whether it will turn out to be a good business investment.

ROI can provide a starting point for determining the value of deploying a particular IT solution, but it's not the only tool to evaluate business value. To start, make sure there's a clear sense of what the company's strategies are so the IT department can map them. What are the business drivers that are making this project happen? How do you map metrics against those business drivers so that you can accurately determine the right things on which to spend the money and evaluate whether the company is getting the gains it wants?

"You need to address a lot of other issues besides simple ROI," says Cal Braunstein, chairman of advisory firm the Robert Frances Group. "You also need to carefully evaluate the strategic value of a given project to your company and its employees, customers, and suppliers." Braunstein recommends assigning values to eight different indices to better evaluate the impact of a project: financial, strategic, competitiveness, relationships, process, functions, usage, and technical.

Questions to ask include: How strategic is the project to everything else that the company is doing in terms of product, industry, and service level? How does it improve or affect your competitiveness? How does it affect relationships between employees and departments? How well has the project improved processes or changed them? What is its functional value, in terms of the added gains your company will get out of the component, product, or service? How does its use affect customers? What is the technical value of the project? And, how well is the project aligned with the company's overall technology architecture?

While the answers to these questions are perhaps not easily quantified in dollars and cents, Braunstein recommends that some type of metric be applied to all of these to gauge the project's impact on each area. "Every company and even every project within a company is going to have unique variables, but it's truly beneficial to have a set of global variables wherever possible," he advises.

Any ROI project is probably 80% methodology and 20% technology. There are no perfect ROI technologies, but the methodologies are fairly straightforward. If you start with somebody's template--free spreadsheets, checklists, and ROI calculators abound on the Web--and customize it, then iteratively fine-tune your data, you're probably going to come close in projecting a ballpark ROI that mirrors reality.

However, the most critical part of the process is establishing a baseline of what your costs are. If you don't, there's no reference to measure against, and you're not going to get a meaningful result. Much money can be spent on automation tools, but the problems won't go away until the process problem is fixed.

Start with a simple set of measurements, understanding the most critical success factors or areas of concern. As you drill down, you develop a process. This can be quite time-consuming. "What we're seeing in the very worst case is nine months to get some very meaningful measurements and communicate those back to the line-of-business executives," Meta Group's Poe says. "This includes getting everything to work in concert with a business growth strategy, customer strategy, or operations excellence strategy. We're seeing some dramatic improvements in ways to use the tools for these best-in-class firms."

For any model to be accurate, you have to capture all the conditions that the company can run into. This makes these models very complex and difficult to implement. There's probably no generic tool that's going to deliver all or even most of what you need, because your company will have its own unique business procedures and all of these things have to be figured in. Most of the tools you'll use must be custom-made. The process of calculating ROIs is both iterative and unending, at least through the life of a particular project.

Many of the ROI calculators and spreadsheet models available on the Web are associated with specific vendors' products, such as an enterprise resource planning suite. They're clearly focused on proving that buying that vendor's product is going to save your company a lot of money. The problem with these tools is that any large IT project is going to involve products and services from multiple vendors and costs of which the ROI tool might not be aware. IT managers should question the validity of the information these tools generate.

"This is especially true in the case of the big frameworks," says Glenn O'Donnell, Meta Group's program director for service-management strategies. "Those models have failed miserably because they don't mirror reality in any significant way."

The more complex the framework, such as SAP AG's, the more difficult it is to get a sense of all of the components that are part of the cost equation. "It's almost impossible to do an accurate ROI assessment on something that complex," O'Donnell says.

It should come as no surprise that the closer a proposed IT project is to addressing a company's critical business-process needs, the less difficult it is for IT to get funding and support. For Henry Maier, VP of automation marketing at FedEx Corp. in Memphis, Tenn., the kinds of projects for which he's responsible have such a demonstrable impact on the customer experience that he pretty much has carte blanche to begin any project he wants.

"Almost all the things that we do can be tied back to better customer experience, which ties back to either reducing costs in the customer's operation or adding features that improve the revenue for FedEx," Maier says. "Anything I can do to make that customer's life easier tends to make it easier for them to give additional business to FedEx."

But looking strictly at numbers can be misleading. Robert Frances Group's Braunstein relates an experience one of his clients had during a merger. The merged companies did cost comparisons between their respective help-desk operations. One help desk was 50% more expensive, but when they considered why, they found that one department hadn't changed equipment or procedures in seven years, while the other had continually re-evaluated and updated these things.

"Which one of them has a better ROI? It depends," Braunstein says. "Things have changed a lot over seven years, and the newer tools are bound to bring about certain efficiencies."

Here's what the experts advise: Set a purposeful strategy toward the greater good of performance improvement. Know the kind of data you want to collect and the type of process you are going to use. Also, make sure there's executive commitment between IT management and business units. Having these things clearly defined will help ensure that your company will achieve an acceptable ROI.

Never Miss a Beat: Get a snapshot of the issues affecting the IT industry straight to your inbox.

You May Also Like

More Insights