Money's tight? ROI to the rescue

How some IT shops are putting good old ROI to use on projects that do more than just improve the bottom line.

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Ian Campbell, CEO of Nucleus Research Inc., is an advocate of keeping things simple. "The worst thing you could do is come up with the next trendy metric," he says. In fact, he maintains, companies really only need two measures, ROI and payback period.

But although he recommends the use of the simplest measures, Campbell does suggest tweaking them with "adjustment factors" to allow for real-world uncertainties. He advocates applying a "believability" discount factor to the estimates that go into investment return calculations -- in other words, reducing the estimated benefits to reflect their uncertainty.

For example, estimates of direct, measurable costs savings might be used at their full value. But estimates of indirect cost savings tied to increases in worker productivity might be discounted by 50%, and "very indirect savings" from increases in manager productivity would get discounted even more. That makes the resulting number more conservative and eliminates a certain amount of wishful thinking, he says.

At the same time, Campbell cautions against allowing these discount factors to be applied on an ad hoc basis. Sometimes, he says, each person in a chain of command reduces the estimated benefits in order to be conservative and not be seen later as reckless. "The chief financial officer doesn't trust the IT department anymore because the IT department has just made up too much stuff," he explains. When discounting happens at multiple points, the resulting estimate is no longer tied to any realistic financial figures.

Instead, Campbell recommends that all the stakeholders in the process -- the analyst preparing the estimates, the project manager, the CIO, the chief financial officer -- work together to develop realistic discount factors and then apply them as consistently as possible from project to project.

Collaboration between IT and finance is just what goes on at P&G, where a person from finance is assigned to work on every major IT project. That person helps prepare estimates of cost savings, incremental sales and return on assets, the three key measures of financial success for a project at P&G.

A favorable number in any of these areas can get a project approved, but the cost and sales numbers -- cranked into an NPV calculation -- are the most frequently used for IT projects. "Any one of those creates value for the company, for our shareholders," Scott says.

At one time P&G tried to apply factors to discount the most uncertain numbers but found that the extra effort had little payoff. That's not to say that the company ignores intangible benefits in its cost-benefit models. In fact, while cost, revenues and return on assets provide an important initial filter, projects must also be seen to meet other, "softer" targets, Scott says.

Those soft targets, such as boosting customer satisfaction, increasing customer touch points or improving product quality, become part of the goals of the project and live on after the project has ended as quality measures to monitor. The goals can be intuitive -- "You know it when you see it" -- but managers do attempt to quantify them, Scott says. Sometimes a proxy measure is adopted. For example, the number of customer complaints becomes a measure of product quality.

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