Measuring Up

IT managers vary in their approaches to tracking return on investment.

In the slowing economy, rigor in financial analysis is back in style, says Tom Mangan, a partner at Chicago-based accounting firm Andersen. "It was almost a forgotten skill—doing an ROI for a business case. But in the past six months, we've started seeing a big emphasis on that," he says. "We are seeing large [IT] projects shut down because they don't show any ROI."

Suzanne Krupa, CIO at Rowe Cos., says she uses simple ROI calculations to help prioritize projects—but it isn't enough. She also uses Economic Value Added (EVA) analysis, which is broader in scope and is geared to maximizing shareholder value. EVA takes into consideration the cost of capital for a project, risk factor associated with the project and a targeted value return percentage.

Krupa says she used EVA analysis to evaluate a proposed enterprise resource planning system for a manufacturing subsidiary. It enabled her to estimate the cost of delaying the project, and when she found that it would be less than the computed cost of the business disruption associated with the system, she decided to postpone the project indefinitely. "The EVA was a tremendous exercise," she says.

Krupa has recently begun using a newer measurement called return on opportunity (ROO). ROO combines more than a dozen factors to assess the rate of change in the business environment, the rate of change in business processes and IT infrastructure, the competitive environment and the value of intangible assets. It focuses on the potential gains in new business from, say, attracting new customers or boosting revenue from existing customers.

Even plain-vanilla ROI calculations would be a big step forward for many companies. In a recent survey of 50 IT executives, Forrester Research found that 54% of organizations either don't measure or use poor metrics to determine the success of technology spending.

For his part, Jeff Marshall, CIO at The Men's Wearhouse, says he uses standard financial measures when they are readily obtainable, as they would be in deciding whether to outsource payroll, for example.

But, he says, people all too often cook the numbers to show what ROI they can to justify their IT spending. He cited an end user who wanted a laptop computer to use in airports, claiming it would make him 30% more productive.

IT priorities are established at Eastern Bank each year by a steering committee. "Nothing gets decided solely on financials," says CIO Lloyd Hamm. However, he says, anything with a payback period longer than 24 months would be unlikely to pass muster.

Hamm says the overall efficiency of IT at the bank is measured three ways: the IT cost per customer account, the IT cost per customer payment card and the IT cost per desktop PC. Management expects all three of them to show improvements from year to year, he says.

John Kopeck, president of IT consulting firm Compass America Inc. in Oak Brook, Ill., warns against relying too much on a single measure. "People used ROI or net present value or cash payback. Then we got into return on capital employed, return on average capital, cash flow ROI and so on," he says. "But there is no one measure that encapsulates enough information to tell the [stock] market what you are doing."


Determining ROI

How is your company measuring its return on investment for IT projects or IT spending:

Decreased costs 83%
Length of time to payback 75%
Increased revenue 71%
Increase in productivity 70%
Project is up and running within a certain time 67%
Reduced head count 57%
Discounted cash flow 32%
Specific ROI formula or benchmark 19%
Not measuring ROI on IT projects 6%

Base of 150 respondents; multiple responses allowed

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Copyright © 2001 IDG Communications, Inc.

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