February 17, 2003 (Computerworld) --
Measuring the return on technology investment has been the Holy Grail for CEOs and chief information officers (CIO) for the past 30 years. Much effort has been expended on trying to quantify the returns in terms of sales growth and cost reduction, from the tens of millions of dollars invested in each new wave of technology, from mainframes to PCs to client/server to enterprise resource planning (ERP) to the Web. Generally, the results have been inconclusive and are often restricted to broad statements about productivity increases being somehow tied to technology investments. This loose causal relationship has been discomforting to many business leaders.
Organizations still invest significant time and effort in complex measurement processes to attempt to track returns. Some are now beginning to question the value of the exercise. The most significant driver has been the ever-increasing integration between technology, core business processes and operations. The pervasive impact of technology now means that in many cases, information technology is so inextricably intertwined with people and processes that the identification of specific technology-related benefit streams is of marginal value. During the first age of business technology, there was a clear distinction between the technology and the other elements the business. Inputs and outputs were highly regulated and structured, and the handoff from people to machines was clear-cut. As the second and third ages took hold, the boundaries have been obliterated, making it almost impossible to isolate each element.
A secondary influence has been the realization that many technology investments have failed to deliver the expected returns, not because of technology failures but because of poor process design or inadequate training and education. Too many investments have simply automated inefficient processes or have delivered incredible functionality that no one fully understands how to leverage. It is only the combination of the judicious use of technology, optimized business processes, and suitably trained and motivated people that can realize the true value of a technology investment. As such, isolating a single input and attempting to measure its impact is akin to assessing the direct contribution of the cheese to a pizza. For many, isolating the return on an IT investment is a pointless question with no meaningful answer. This does not mean that they ignore ROI measures -- quite the contrary.
So how should IT investments be evaluated? First, abandon the idea that there are IT projects -- there are no such things anymore. There are only projects targeted at improving business processes, developing new products or services, delivering more efficient customer service or improving some other aspect of business performance. The evaluation of ROI needs to match the total investments with the total returns, regardless of the source of each. This leads to the utilization of broader investment criteria than have traditionally been used for IT projects. Techniques like Monte Carlo simulations, scenario planning and Real Options are increasingly being used to assess the speculative and uncertain nature of project returns.
For example, consider the investment in a new customer relationship management (CRM) system. Typically, the expected benefits from such investments are framed in terms of improved customer satisfaction leading to increased retention and/or use of your products and services, together with an improved ability to target customer needs. However, the implementation of the new system is only one element in ensuring full value is realized. Having perfect customer information without adequately trained customer service representatives to interpret and act upon that information or without providing the insights derived from your CRM system to your sales force or product-development organization ensures that the return on investment is not maximized.
Hence companies are now beginning to value ROI by addressing three key inputs to any project: people, process and technology. These inputs are matched to the quantifiable returns measured against one or more measures of business performance. In the CRM example above, the investment evaluation would first address the returns to be gained from implementing a new CRM system (technology). Second, they need to develop a set of processes to communicate the insights gained from better customer information to the sales force, so they can close more deals, and to the product development team, to refine and design better products (process). And finally, training customer service representatives to both interpret and respond to the new customer information to deliver better service (people).
Once investments are viewed in this context, it becomes easier to define expected benefits and subsequently measure those returns. One other crucial consequence is that this explicitly demands the creation of multiskilled, cross-functional teams with shared accountability and responsibility for success. No longer can users point fingers at IT and vice versa, since the degree of mutual dependency for success is explicit.
We are now beginning to see the development of processes and tools that accommodate a more holistic and realistic view of the world. For example, applying portfolio management techniques to the evaluation of a series of projects, rather than treating each project in isolation, allows for the evaluation of uncertainty in estimating future benefits under different assumptions.
Over the next few years, it is likely that boards and senior executives will increasingly seek to better understand the total expected returns from major projects where technology is a major component. This should drive adoption of broader, more business-based, evaluation methods.
Technology is likely to remain both the biggest opportunity and the biggest challenge to operating efficiency in the years to come. Best-practice organizations will distinguish themselves by their ability to balance the speed with which they deploy technologies with the organization's ability to effectively translate new technology investments into tangible results.
Excerpted from the book Best Practices in Planning and Management Reporting, by David A.J. Axson and The Hackett Group, an Answerthink company (John Wiley & Sons). (c) 2003, all rights reserved.
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