SmartAdvice: There's More Than Cost Benefits To Consider When Analyzing IT ROI - InformationWeek

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7/23/2004
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SmartAdvice: There's More Than Cost Benefits To Consider When Analyzing IT ROI

Look at six broad categories for quantifiable benefits when analyzing the value of IT investments, The Advisory Council says. Also, search-engine optimization is key to wise marketing; and CIOs need soft skills along with business skills.

Editor's Note: Welcome to SmartAdvice, a weekly column by The Advisory Council (TAC), an advisory service firm. The feature answers three questions of core interest to you, ranging from career advice to enterprise strategies to how to deal with vendors. Submit questions directly to [email protected]


Question A: How can we quantify business-productivity improvements when analyzing IT return on investment?

Our advice: One of the biggest challenges when performing IT ROI analyses is finding and quantifying business benefits. Benefits such as improved morale and enhanced customer satisfaction sound great, but are in most cases impossible to quantify in financial terms. Since cost savings are the simplest benefit to quantify, too many ROI analyses fall into the trap of relying entirely on costs to justify investments. For example, getting a 10% improvement in productivity for a 10-person team means you effectively gain an extra person. From a cost-savings viewpoint, you receive the salary, benefits, and overhead from one eliminated job. But what's the value of that person's production? Assuming they produce business value in excess of their cost (for example, a $100,000 salesperson may bring in $1 million in revenue), the better calculation focuses on the increased value gained from the enhanced productivity.

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Tying IT Expenditures to Business Value Delivered


All financial benefits come from either lowering costs or increasing revenue, but six broad categories to explore for finding quantifiable benefits are: increasing sales (revenue), increasing productivity (revenue, cost savings), reducing operational costs (cost savings), improving customer satisfaction (revenue, possible cost savings), improving safety (cost savings), and enhancing competitiveness (revenue). Dollar value isn't the only factor when quantifying benefits. Also consider the following attributes:

  • Substance -- Is the benefit tangible and quantifiable? For example, increasing revenue by 10% is a tangible benefit, while improving employee satisfaction is almost impossible to tie to bottom-line dollars.
  • Potential -- How large is the benefit if fully received? In our example, the cost savings potential is $100,000 while the revenue potential is $1 million.
  • Certainty -- How likely is the company to receive the benefit? Replacing a telephone service plan that costs $40,000 a year with an equivalent one at half the cost generates $20,000 of highly certain benefits. Improving sales productivity by 10% should increase gross revenue by 10%, but there are no guarantees, therefore lowering the benefits certainty.
  • Although cost savings are the easiest benefit to quantify when evaluating productivity improvements, try to consider the value that can be generated by the extra productivity first. It's often larger and more attractive than the cost-savings approach.

    -- Ian Hayes

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