ROI calculations done right can help IT projects

Computerworld - Several years ago, Todd S. Coombes proposed a project at a company where he was then CIO. "It was a legacy modernization of some of our older systems and data conversion to the newer platform," he recalls. "It was very important to IT."

But his proposal had to compete against hundreds of other uses of the company's capital, measured against time to payback. "A lot of companies like to do projects if you can get an 18- or 24-month payback," says Coombes, who recently became executive vice president and CIO at ITT Educational Services, a post-secondary educational company based in Carmel, Ind., with 140 campuses around the country. "A lot of these legacy data conversions will have about a seven-year payback, and that's not so great."

The first year that Coombes proposed the project, it was rejected in favor of others with better ROI. The next year, he proposed it again, and again it was rejected. But the third year, he got the go-ahead. What had changed? "In that second year, we had some major, business-impacting outages that were a result of not having done this project," Coombes says. "I explained that it was just the tip of the iceberg of what could happen if we continued not to address things that needed to be addressed just because they didn't match the hurdle rates we were trying to achieve. I think it was eye-opening for a lot of our business counterparts."

Computerworld - Several years ago, Todd S. Coombes proposed a project at a company where he was then CIO. "It was a legacy modernization of some of our older systems and data conversion to the newer platform," he recalls. "It was very important to IT."

But his proposal had to compete against hundreds of other uses of the company's capital, measured against time to payback. "A lot of companies like to do projects if you can get an 18- or 24-month payback," says Coombes, who recently became executive vice president and CIO at ITT Educational Services, a post-secondary educational company based in Carmel, Ind., with 140 campuses around the country. "A lot of these legacy data conversions will have about a seven-year payback, and that's not so great."

The first year that Coombes proposed the project, it was rejected in favor of others with better ROI. The next year, he proposed it again, and again it was rejected. But the third year, he got the go-ahead. What had changed? "In that second year, we had some major, business-impacting outages that were a result of not having done this project," Coombes says. "I explained that it was just the tip of the iceberg of what could happen if we continued not to address things that needed to be addressed just because they didn't match the hurdle rates we were trying to achieve. I think it was eye-opening for a lot of our business counterparts."

Coombes' experience at that former employer illustrates a conundrum for many CIOs: how to accurately project the economic impact of a proposed technology. Net present value, internal rate of return and time to payback are all measurement methods CIOs must understand and use to help business leaders decide whether or not a tech investment is worth making. But many IT leaders lack the financial sophistication to precisely present the information CFOs and CEOs seek. And even if they can, the financial metrics won't work for most IT projects.

"Seventy percent of technology initiatives don't have a direct measurable effect on the bottom line," says Gartner analyst Michael Smith. "Social media is an example of that, as is CRM and, in many cases, knowledge management and collaboration. These all have financial benefits, but they are indirect. Many IT management folks who are asked to project the ROI of items like these find it a very frustrating experience."

Frustrating, yes. Optional, no. Like it or not, especially in these times of constrained financial resources, IT leaders must be able to support essential projects with sound ROI reasoning. Here are some approaches that can help.

Face It: IT Needs Financial Training

All enterprise IT leaders these days recognize the importance of return on investment when deciding which projects to pursue. But few truly understand financial principles, says Peter Weis, CIO at Matson, a Honolulu-based shipping company with $1.6 billion in annual revenue. "It goes back to the traditional career path of an IT manager," he says. "It's easy to move up the ladder on a set of core skills that have nothing to do with corporate finance. For instance, I myself started in software development."

Financial skills are considered a plus, he says, but applicants with core technical skills get hired for executive positions without them. "It's been self-limiting," says Weis. "Finance needs to not be an afterthought. It needs to be as core to your skill set as leadership or IT strategy."

Weis feels so strongly about this that he went back to school to earn an MBA. "In a two-year program, you learn about finance in depth," he says. While Weis doesn't believe every IT leader needs to do that, he says, "It made me much better at corporate finance."

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