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ROI: Do the Math!

The Almanac: ROI

An eclectic collection of research and resources.

Mitch Betts Today’s Top Stories

or Other ROI Stories

February 17, 2003 (Computerworld) -- Beware of Fuzzy Math

When Computerworld conducted an online survey on IT return-on-investment techniques last month, one of the more interesting comments we got was this: "Many times, investments are gambles into where the business is going and ROI [calculations] are fabricated."

Indeed, we continue to get reports of ROI numbers that have been fudged in order to get IT expenditures approved. "It happens all the time," says Amir Hartman, co-founder of Mainstay Partners LLC, a management consultancy in Redwood City, Calif. Office politics, time pressures and less-than-rigorous ROI processes can lead to cooked numbers. "The project sponsor will get a call from his boss saying he needs an ROI number next week. That broken process drives the bad behavior," says Craig LeGrande, Mainstay's other co-founder.

One CIO quipped, "As we say in IT, I don't believe in any numbers I haven't massaged myself."

On the ROI Bookshelf

• The Alignment Effect: How to Get Real Business Value Out of Technology, by Faisal Hoque (Financial Times Prentice Hall, 2002). Advocates a step-by-step "business technology management" methodology for getting the business, processes and IT in alignment - before any money is spent.

• The Valuation of Information Technology, by Christopher Gardner (John Wiley & Sons, 2000). Describes how to perform the financial calculations to make sure that IT produces shareholder value.

• Manage I.T., by Joe Santana and Jim Donovan (Lahaska Publishing, 2002). Chapter 2 teaches newbie CIOs how to get business and IT in alignment.

• Revolutionizing IT: The Art of Using Information Technology Effectively, by David H. Andrews and Kenneth R. Johnson (Wiley, 2002). Explains how to prevent IT project failures.

• Achieving Business Value From Technology, by Tony Murphy (Wiley, 2002). A Gartner Inc. consultant's executive guide to identifying, tracking and achieving business benefits from IT.

Four New IT Lieutenants

Most IT management staffs "are a kludge of unstructured hirings, promotions and compromises," says Jonathan Poe, an analyst at Meta Group Inc. Therefore, new CIOs who want to succeed past their honeymoon period will need to clean up the mess and install a team of talented IT lieutenants to handle certain tasks, such as personnel matters, so the CIO can focus on IT/business alignment.

Poe says the new IT organizational chart will have four lieutenants:

• The organizational development leader, a "change agent" who's in charge of constantly updating the IT department's mission, vision and values.

• The IT human resources manager, who handles recruiting, "reskilling," promotions, performance evaluations, compensation analyses and employee satisfaction.

• The IT financial controller, who deals with budgets and depreciation, manages portfolios and risk, and measures ROI and total cost of ownership.

• The IT communications director, who makes sure the IT shop sends clear and consistent messages, from marketing materials to status reports.

Usability Has Big Payoff

It makes sense that Web sites that are easier to use have a bigger payoff than ones that aren't. Now comes research on the ROI of Web site usability to back up the notion.

A study of 42 e-commerce sites that were redesigned for better usability found that the sites had a 100% increase in the sales conversion rate, a 150% increase in traffic, a 161% increase in user performance and a 202% increase in the use of specific, desired features.

The research was done by usability guru Jakob Nielsen at Nielsen Norman Group in San Francisco. Nielsen says he was pleased to see that the redesign projects allocated an average 10% of their budgets for usability improvements—up from 6% in an earlier study—but he says it should be even higher.

Viewpoint

"Software costs are the most misunderstood, poorly managed costs within IT organizations. Good software asset management must begin with cost modeling to identify the long-term costs and possible risk exposure associated with licensing software. Contracting for software entails more peril than IT commodity items, yet we continue to see IT organizations—and more often, project teams—fall for vendor hype, with negative results. The importance of cost modeling cannot be understated. In these lean economic times, locked-in software costs cannot be reduced, which prevents effective cost control. Our research continues to indicate that more than 70% of software cost models fail to illustrate the total economics of software acquisition."

- William Snyder, analyst, Meta Group Inc., November 2002

IT Discipline
Does your organization calculate the ROI or total cost of ownership for major technology deployments?

BASE: 99 IT managers

Source: Cutter Consortium, Arlington, Mass., September 2002

The ROI Metrics Scorecard
Which of the following financial calculations does your organization perform when deciding to make a major IT investment?

Payback period	32%
Internal rate of return	21%
Net present value	20%
Economic Value Added	12%
Balanced scorecard	7%
None, no financial ROI calculations	6%
Other	2%