5 Metrics for the Books

Computerworld - "Show me the money." That's really what executive purse tenders want when they ask for the ROI on a proposed IT project.
The problem is that most IT managers don't know how to point out the financial potential of an IT project in terms that business managers want to hear or can understand. In a Computerworld poll conducted in March of more than 150 senior-level IT executives, two out of three said they lack the knowledge and/or the tools to even compute ROI calculations.
We asked three experts about five ROI metrics that financial and business managers consider basic tools of the trade. The following is a summary of how and when the metrics can be applied to IT projects.
1 Metric: Return on Investment (ROI) What It Is: A catchall phrase commonly used for any of several ways to measure the business value of a project. In financial terms, ROI means profit divided by investment, expressed as a percentage. As the numerator, profit can be replaced by cost reductions or productivity gains derived from the operational improvements an IT project yields.
How To Calculate: Revenue or cost savings divided by investment.
Advantage: Best applied to projects where all costs that will be incurred or all cost reductions that will be realized are known ahead of time, usually from experience on a similar project.
Disadvantages: Difficult to apply to entrepreneurial, or "transformative," IT projects that are designed to help launch new products, services or businesses that translate to new sources of revenue and profits. ROI also doesn't consider risk as a factor.

2 Metric: Net Present Value (NPV) What It Is: NPV refers to the future net cash flow that a project is expected to deliver, minus the investment. It defines the value of a project in "today's dollars."
How To Calculate: Cash inflow minus cash outflows calculated in today's dollars. Example: Kay Carr, CIO at St. Luke's Episcopal Hospital in Houston conducted an NPV analysis in connection with the purchase and implementation of a document imaging and management system. Carr determined cash inflows by calculating what the hospital spends annually on microfilm, records storage, medical records staff and other record management overhead costs, which would all be reduced or eliminated with the new system.
Advantages: Includes all cash flow related to a project. Considers the time value of money, or the difference in the value of a dollar today and what it might be three years from now.
Disadvantage: The highest NPV doesn't always correspond to the most efficient