In the 1996 movie ‘Jerry Maguire’, when the client of the sports promoter, played by Tom Cruise, demands that he repeatedly and loudly chant ‘Show me the money”, he is hammering home the point that he fundamentally wants the best return for the fees he’s paying. These four words could well be the ROI mantra for board members today when they consider IT projects.
ROI is a critical measure that can determine whether a project ever gets off the ground, but how it is calculated and what factors are taken into account, is where the problems arise. This is the perennial problem of how to measure the business value of IT; how to properly substantiate the fundamental business worth of information technology.
Accenture Australia’s lead partner, Strategic IT Effectiveness, Ralph Thompson, said that demonstrating the tight linkages between IT investment and IT and business performance, has largely been inconsistent.
Measurement culprit
Thompson said that measurement problems were generally recognised as the culprit, especially in service-related industries, where outputs are not as apparent and tangible, compared to the manufacturing sector.
“Measuring ROI is critical and Accenture uses methods such as Internal Rate of Return (IRR) and Net Present Value (NPV) in measuring efficiency and value to help determine the value of IT investment returns to the business,” he said.
“Successful measurement needs the suitably thought through application of methods which need to be meticulously performed, over a specified term, to obtain accurate results.”
Thompson said that, as IT investments are largely manifested in IT projects, measuring qualitative and quantitative aspects of project performance and the resulting impacts on organizations offer a clear path to measuring ROI. However, studies and observations indicate that close to 80 per cent of IT projects fail, and that there are challenges in measuring created or destroyed value.
“In our experience, ROI needs to remove the subjectivity associated with many of the value variables (i.e. people, structure, politics, resources, etc) in a client’s organisation,” he said.
“If done properly, economic justification methods used in framing IT decisions and benefit measurements, carried out during and post project implementation, will depict values that are consistent with what was actually delivered.”
Many ROI pitfalls
Frost & Sullivan’s deputy director, ICT consulting, Kaustubh Dhavse, says there are many pitfalls in appropriately calculating ROI.
“In some cases,” Dhavse said, “organisations overlook the Total Cost of Ownership (TCO) of the projects when calculating ROI. They fail to measure the intangible benefits like customer satisfaction, which ally themselves with the long-term vision of the organisation.”
He says even public entities have now become revenue-focused and demanding of clear ROI metrics.
“Previously, government organisations seeking to evaluate the worth of an information technology project have typically used metrics such as return on investment or cost-benefit ratios. But it’s wise to factor in elements that can’t necessarily be expressed in financial terms, such as the value the IT project will bring to the public.”
Some other common ROI pitfalls are that sometimes, precisions of a higher degree do not exist and ROI fails to account for future opportunities and can often fail to incorporate risks.
Weak on intangibles
Dhavse says that adopting traditional ROI methodologies can be useful for those industries where the tangible component of costs and benefits is higher than the intangible components.
“It is easier to measure these tangible components and the ROI calculation gives a fair idea,” he said. “At the same time, ROI calculations are difficult for those sectors where the time frame of the projects in consideration is high. Hence adoption of ROI methodologies might be high in manufacturing sectors and low in sectors like IT services (where the benefits are intangible) or the government sector (where the duration of projects in consideration is long).
A recent study by The Economist found that nearly 70 per cent of public sector executives, worldwide, stated that they aim to measure social returns on IT initiatives and make these transparent to citizens and stakeholders in the next five years. Various analyst projections indicate government IT spending will grow strongly during the coming years, surpassing many commercial sector markets.
Public return on investment
Dhavse said that governments—mindful of concerns about traditional ways of calculating ROI—have now even developed their own concept called the Public Return On Investment (PROI).
“The US Center for Technology in Government in New York, defines PROI as a measure of the delivery of specific value to the people and the improvement of the value of government itself as a public asset. This is not easily expressed in financial terms, but rather in scalable terms of current or potential end-user, statutory, policy or regulatory cost avoidance.
As an example, Dhavse cites a notification system that allows local school administrators to e-mail school closings to parents, that clearly benefits the health and safety of students.
“But there are also time savings for parents who don’t have to scan a scrolling list of statewide school closings and for schools that are able to disseminate rapid updates should the situation change,” he said “PROI gets at the societal benefits derived from an IT investment. Hence by using ROI, we may not get a complete picture of the overall efficiency, effectiveness and intrinsic enhancement.”
Kyung Yang, senior manager with Deloitte Consulting in Singapore, said that properly calculating ROI was not just a matter of plugging numbers into an equation.
“It’s about ensuring that the benefits and costs included in it, are those arising from undertaking one or more IT initiatives that address the pain points to achieve the goals outlined in the business case,” Yang said. “Solid ROI figures therefore arise out of solid business cases.”
John P. Roberts, vice president and analyst with Gartner, agrees. He said that the problem was not with ROI methodologies, but rather in the inadequacies of preparing sound business cases.
“One problem has been that IT vendors sell their products not on the basis of ROI, but rather on features and functions, relying on businesses to decide on the business case.”
Roberts’ advice to major organisations on the issue of ROI methodologies: “Use portfolio management so that all proposed investments in IT are evaluated on a consistent basis.”
No one solution
Deloitte Consulting’s Kyung Yang said that adoption of an ROI, or any valuation methodology, was not a solution in itself. Such methodologies, he said, need to be supported and augmented by robust processes, tools and metrics.
“Many companies fail to achieve an effective ROI due to a number of reasons,” Yang said. “One critical component of a company’s ability to demonstrate a clear ROI is its maturity.”
This Deloitte Consulting senior manager is of the view that, not only is obtaining an accurate measurement of ROI not an exact science, it may not even be the right way to think about measuring payoffs.
“By focusing solely on what is measurable and quantifiable in terms of dollars and cents, companies risk jeopardising intangible benefits such as brand name, customer satisfaction, and innovation,”he said.
Yang maintains that the ROI analyses done during the planning-sales process are a great first step. Unfortunately, ROI plans typically wind up on the shelf once the decision is made to go ahead with the project.
“IT and the business should be working together to determine the expected business value of an initiative during the planning process and then measure and continually improve actual results after deployment.”
Research house OVUM’s research director, public sector, Dr Steve Hodgkinson said that CIOs need to be part of the decision making process around business investments with a significant IT element.
“The decision, however, should be judged in terms of its overall ROI as a package of business change, not by any particular focus on the IT elements, and the accountability for the overall investment should rest with a business executive, not the CIO,” Dr Hodgkinson said.
“Maybe the root of this is that CIOs should seek to avoid being forced into the position of being held responsible for the ROI of information technology investments outside of core infrastructure—which can be judged using technical efficiency-economic logic.”
He said that business executives need to understand what it is they need to do for their business to be successful and make appropriate investments in operational capacity to achieve their goals. The investment is in business operational capacity—not information technology.
“A big problem with ROI discussions is that we forget how to have common sense discussions about IT investments at the senior executive level—in terms of business impact and business value rather than complex algorithms and spreadsheets,” Dr Hodgkinson said.
“CIOs who set themselves up as being responsible for the ROI on business change are asking for trouble—they will inevitable fall foul of the evils of being accountable for things that they have no control over.”
