In the world of information technology, return on investment (ROI) is king. But should it be?
How many approved IT projects have you seen with projected returns that – in spite of the vetted calculations – you just didn’t believe? And how many projects, rejected because ROI could not be calculated or proved, would have turned your company into a well-oiled machine?
ROI can be a great tool, but it’s not the only mechanism for judging value. You may be using the wrong tool – like using a chisel instead of a screwdriver.
“Information Technology” – both the technology itself and the department or team organized to apply it – is a means to achieve business objectives. Its value is derived from how well it achieves this objective. So, how is value achieved? Here’s how:
• The company sets its business objectives (e.g., establish manufacturing sources in two new continents).
• IT sets its own objectives consistent with its mission and with the business objectives (e.g., enable integration with external manufacturer’s applications).
• IT designs its projects and services with the intent of achieving its objectives (e.g., build secure remote manufacturer communications, develop integration toolbox, extend reporting dashboard for extended manufacturing systems).
• The outcome of the IT preparation is changed operations and the concomitant benefits.
• The changed operations drive achievement of the business objectives.
So where is the value of IT? It is in the achievement of its internal objectives (ability to exchange designs with remote manufacturing systems, in this example), and it’s in the indirect achievement of the business objectives (establishment of new manufacturing sources). If these objectives have been designed correctly, they are measured over the long term, and over many projects. The value of IT is not in the ROI calculation of any one project (extended dashboard for reporting, for example).
ROI may be illustrative for a single project, but it’s not a measure of IT value.
Given that reality, and the fact that there are always more projects than there is budget flexibility, how does an organization choose which one to tackle? The snap answer is “pick the projects with the highest ROI for the money.” But not so fast! Would you choose a project, all other things being equal, if another project brought some capability online more quickly? Probably not.
On the other hand, would you pick a project that yielded no new revenue, but prevented erosion of revenue from a competitor? Probably, because the business impact is potentially significant.
Good IT governance suggests that there be a sensible, understood and predictable scheme for choosing projects. This requires a scoring scheme agreed to by all who have a say in IT’s work. The scheme can have any number of factors – ROI/impact, conformance with objectives, number of objectives served, time to impact, etc. Pick your factors and the weighting of each. Certainly ROI fits into the scoring scheme, but it’s not the only factor.
One way to improve IT’s value to the business is to assure that it’s an agent for positive change. Are projects about running the business, growing the business or transforming the business?
• Running the business includes all IT activities that support day-to-day operations of the business. IT projects in this group are often motivated by cost savings. Calculations for projects of this kind are usually straightforward – you can compare the projected cost reduction with the amortized investment.
• Growing the business includes work that increases revenue or sourcing capability, fueling organic growth, increasing demand or supporting a new line of business. Here, you can compare the projected growth with the amortized investment. To be credible, these ROI projections must be vetted by an experienced and knowledgeable group and may require some market research or research into past industry experience with similar work.
• Transforming the business includes work that creates new, faster or less work-intensive business processes or that supports new business models. Projects in this group are based on the assumption that IT can be an innovative and disruptive force, driving business to change for the better. Still, who knows the outcome with certainty? Cost per thousand (CRM) is a perfect example. How can you calculate the benefits of knowing your customers better or of the personalized touch you can now offer them? Because transformations almost always have unintended consequences – good and bad – it’s impossible to predict all the outcomes.
In summary, ROI projections can be highly credible for run-the-business IT projects. They will be less so for grow-the-business projects. ROI calculations can be illustrative examples for various scenarios in transformation projects, but they are not definitive. So, use them where they are real predictors, but take them with a grain of salt where they are suggestive. •
Stephen Lipka is a principal of Avatar Strategic Partners, where he guides clients to higher profits through better use of information technology. He can be reached at slipka@consult-avatar.com
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