Projects: Breaking the ROI Barrier

Origin: CIO Today Magazine (http://www.ciotoday.com)
By: Erika Morphy
Date: 09/05/2003


Establishing a definitive ROI business case has become a requirement for most software projects. In fact, many firms are finding that the decision to purchase an application is no longer in the business line manager's hands. More and more, the CFO or even the board of directors is insisting on granting approval for expenditures as low as US$1 million.

"The financial scrutiny around any kind of software procurement or CRM implementation is exceptionally high these days," Bill Henry, vice president of marketing and strategy for PeopleSoft Global Services, told NewsFactor's CIO Today Magazine. In large part, this is a reaction to the economic environment and tightening IT budgets. But Henry also pointed to a shift in mindset among top management that he said he doubts will change when the economy finally turns around.

"This level of scrutiny will be with us for a while, at least until boards and executives feel more comfortable that they are getting a return on their investments," he predicted.

Too Far in the Wrong Direction?

To be sure, such rigor is a welcome change from the go-go 1990s, when software investments were often based on blind faith that automation automatically equaled returns. But has the pendulum swung too far in the opposite direction, with C-level management insisting on a quantitative business case for every investment? Many would argue that other goals besides ROI should get equal time in a buy-in discussion, such as improved business processes, higher employee satisfaction or better IT security.

Consider Canon Canada, which recently implemented RightNow Technologies' Locator 3.0, an application that provides Web site visitors with store information and maps. As with any investment, the company calculated the costs saved, revenues gained and customer calls prevented, Steve Mackay, senior manager of the company's customer information center, told NewsFactor's CIO Today. Some of this calculation was simple: Reduction in the number of calls the company received for directions to a particular store, for example, is easily quantifiable. But, he added, "we also knew that by providing this information we would increase sales -- only that was more difficult to quantify."

Spinning Perceptions

Unfortunately, although companies recognize that enterprise applications can meet critical goals that are not always concrete or quantifiable, ROI is still seen as the only reliable tool a company can use to get a handle on costs and expected benefits -- in large part thanks to earlier investments that either spun out of control in terms of costs or delivered seemingly little value for one reason or another.

The problem, according to Bob Emmel, senior manager and leader of Deloitte & Touche's Chicago CIO Advisory Services Group, is that there is a perception gap of the value of IT investments between the tech department and the rest of the enterprise -- a gap that can be bridged easily if CIOs change the way they present IT projects.

"Even after all this time, technology is often perceived outside of the IT department to be implemented just for the sake of new technology," he told NewsFactor's CIO Today.

Value -- as opposed to strict ROI -- can be difficult to measure and quantify and is different for each company, he said. For example, the value placed on a tech initiative in the healthcare industry would be totally different from the value placed on similar technology that might be implemented on a broker's trading floor.

The latter scenario is quantifiable, while the former is not, according to Emmel. In a hospital environment, he noted, value might be better measured in terms of making nurses' schedules more efficient or reducing the cost of procuring drugs.

The Crux

Herein lies the crux of the problem. "Too many people measure IT investments in terms of reducing costs," Emmel said. "But to get a holistic view, a company has to be able to rate the total return on investment." This requires not only quantifying costs and, to a certain extent, benefits, but also measuring progress made after an IT investment is implemented.

This latter point can be tricky, he said. For example, a company may measure the number of calls that come into a contact center but may fail to note why users felt the need to make the calls.

At bottom, though, it is essential to remember that ROI can consist of many different factors, some quantifiable -- such as decreased costs -- and some not so. In short, there is no rule of thumb or standardized calculator to determine ROI, no matter how much a CFO would like there to be.