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February 17, 2003 (Computerworld) --
Their methods may vary, but IT executives who calculate return on investment before launching major technology projects say they reap benefits that make doing the math worthwhile.
The most obvious payoff is getting resources to do the job, but the ROI process also forces IT to explain to corporate management what's going on. This can provide buy-in for a particular project. It also enforces two-way communication between the CIO and other company executives about IT's overall role in the company.
Here's what four IT executives say about the benefits and lessons learned from their ROI calculations.
Factor in Business Goals
Just about all the IT executives interviewed for this article agreed that using a single ROI model isn't enough to justify an expensive technology buy.
"Anybody can play with the numbers and make an investment look attractive," says Steve Brown, CIO at Carlson Companies Inc. The Minneapolis-based travel conglomerate and parent of Radisson Hotels, among other brands, recently enacted a more stringent set of guidelines for IT projects. To get approval, IT projects have to add to top-line revenue growth or profit, reduce costs, create or strengthen the existing brand image or mitigate a risk. The guidelines help the company steer clear of bad investments and maximize the investments it does make.
"Each measurement is something important to a specific business unit or to the company to help us grow," says Brown. "As conditions change, we can measure the effect of the changes in each business unit's quarterly results. So if something changes in the business, we can tie it back to our strategy—it's not a lagging indicator."
Look Beyond Financials
But where Carlson turned to a stricter approach to ROI, Catherine Kozik, CIO at bandwidth services provider Tellabs Inc. in Naperville, Ill., went the other direction. "We do simple math," she explains. "We look at the fully loaded costs for the first two years—implementation costs, people and acquiring skills. But there's a limitation to the accuracy of the data in many ROI models, so what's the point? If you're making up numbers to begin with, it's not really going to help you" decide whether an IT project makes sense.
So instead of a financial-only ROI process, Kozik's group looks at many factors as part of its overall evaluation of any new technology. First is how mature the technology is and whether it represents a continuation of the company's existing skill set or a totally new direction.
Kozik's group also looks at the market position of the vendor—not its financial strength—she says, because in a down market, many technology providers are struggling. Instead, she figures, if the product or service has the lion's share of its market, it will continue to be offered, even if the vendor is ultimately acquired by another.
The last step is viewing the project in the context of the firm's overall strategy. "Not the written strategy or whatever people are paying lip service to, but the things that are really important to the executive team," Kozik says. "I consider it my No. 1 job to keep in touch with what's going on at that level."
After all these factors are gathered and given a numerical weight—costs, skill sets, market position of the vendor and how the project fits with Tellabs' overall strategy—the IT team assigns the pending project an assessment number. The lower the number, the more risky the project and the more iffy its likelihood of success.
All told, the entire ROI process takes only about two weeks at most. "We don't want to overengineer the process, because then people would walk away," Kozik explains.
Save ROI for Big Projects
La-Z-Boy Inc., a furniture maker in Monroe, Mich., takes a different approach. There, ROI analyses are done only for "major" IT projects—those over a certain dollar amount that Gary Clark, director of corporate IT services, declines to specify. He says that perhaps 10% to 20% of all IT projects are put under a sharp financial microscope, but those projects represent a majority of the IT budget.
Clark echoed a sentiment heard from other CIOs: Because of the time and resources required to do any type of major financial analysis of new technology, many shops reserve a truly in-depth ROI process for their biggest-ticket or highest-impact strategic initiatives. Adding more PCs or storage to existing systems is hardly worth the effort in most cases; those kinds of expenditures typically come out of the operations budget.
La-Z-Boy looks at any projects that are subject to ROI analysis for how much the initiatives will cost in terms of ongoing maintenance fees, as well as for net present value. The net present value method essentially figures out how much the project's future net cash flow will be worth in today's dollars. That amount is then compared with the amount of money needed to implement the project.
Even for technology projects, calculating ROI isn't necessarily an IT-only endeavor. Business users and/or financial people may gather the data and work on some of the analyses for the largest projects. As Clark says, "It's not our expertise to understand what a CRM package is going to bring to the company; the business unit is the one that knows. So they're doing the ROI on that the data."
Work With the Finance Folks
At General Motors Corp., IT staffers work closely with the financial organization to do ROI analyses, says Tony Scott, chief technology officer at the automotive giant. "The financial organization has a formal ROI calculator—what we're replacing, current costs, future costs, transition costs and other metrics," he says.
Where this model isn't as helpful is when technology is being used to do something completely new. "If we have a new business venture, there's nothing to compare it against"—no historical trends or costs, Scott says. This is where it's crucial to align organizational objectives, he explains. It becomes a lot easier to justify something when you can show that it will grow customer retention by 15%, because that benefit is already well tracked and well understood.
One key ROI metric is time spent or saved, and GM has used technology to help reduce the time it takes to develop a new car from 48 months to 18.
Both complicating and helping matters is GM's organizational chart. Within IT, there are CIOs responsible for overall IT profit and loss (P&L) within a given geographic region. Then there are PIOs, or process information officers, who are responsible for specific horizontal applications across all geographic regions—manufacturing or finance, for instance.
"There's a natural tension between PIOs, who want to drive new applications, and CIOs, who want to optimize P&L for their region," Scott says. "There are interesting discussions about what's the right thing to do at any intersection of that matrix." One result, though, is that "it's hard to pull the wool over anyone's eyes—you have to make a business case in each geographic region" for any major new technology initiative, he says.
As Tellabs' Kozik explains, "If you focus just on the ROI calculation, then you're playing liar's poker. The biggest liar is going to win, and that's ultimately not a successful business practice. So we have to get back to what we're trying to achieve: value to our customers and shareholders. Our justification process makes sure we're working on the right things for the business."
Ambrosio is a freelance writer in Marlboro, Mass. Contact her at jambrosio@earthlink.net.
DO'S AND DONT'S
DO CREATE
an ROI document that explains what you’re pitching and why, and what the different options are. Use visual aids to help explain the technology you’re proposing.
DO USE
ROI within a broader context – with a balanced scorecard, for instance – to know where all your IT projects stand relative to one another.
DO JUSTIFY
IT expenditures in terms of how they’ll make the company more successful.
DON'T CONDUCT
an in-depth ROI analysis for every project; it takes time to do it properly, so save it for your major expenditures or key initiatives.
DON'T FORGET
to figure the level of risk for a particular project. If you’re proposing several high-risk projects at the same time, you’re probably setting yourself up for failure.
DON'T NEGLECT
to revamp your ROI process every year or two. Like any other process, it needs to keep up with company, competitive and global economic changes.
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