In search of ROI measurements

Thanks to the recession and the resulting push to contain costs, ROI has become a big buzzword in IT. Yet few companies are tracking ROI in a consistent and standard manner, says Kazim Isfahani, an analyst at The Robert Frances Group in Westport, Conn.

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Setting up an ROI methodology

  • 1. Create an ROI program that's headed by an official in the CFO's office who becomes the ROI guru.
  • 2. In addition to calculating ROI, the ROI guru should serve as an evangelist throughout the company, promoting ROI and how to implement it.

  • 3. The ROI guru should hold weekly or biweekly meetings with business and IT players to create a standard method for ROI measures. After three months, they should develop a template of measures to be used for future IT projects.
  • 4. The ROI guru must get the CFO and CIO to buy into the strategy that the business and IT players have developed.
  • 5. Create a "life cycle cost of ownership" method for measuring IT projects. During the implementation phase, the ROI guru can derive data on full life cycle costs for each IT function. These should then be measured for each new project.
  • SOURCE: Lou Marcoccio, Marcoccio Consulting, Westboro, Mass.

Two companies that have embraced standard ROI measurements - Merrill Lynch & Co. and Compaq Computer Corp. - began implementing their own standard IT planning processes more than two years ago. In both cases, managers had a hard time setting up the methodology, because the IT process was time-consuming and highly political. But the result for both organizations has already been worthwhile in terms of financial payoffs and in raising the strategic value of IT within the companies, managers report.

About 23% of U.S. companies require a detailed ROI analysis to justify investments in all IT projects, according to a December 2001 survey of 1,200 businesses conducted by Marcoccio Consulting in Westboro, Mass. That's up from just 9% in March 2001, an increase that leads consultant Lou Marcoccio to predict that by the end of this year, 65% of companies will require a detailed ROI analysis to justify IT projects because of pressure from top management, executive boards and shareholders.

"ROI is going to be much bigger going forward. . . . It has to be much more than a fire drill to make a difference," says Marcoccio, author of a book on best practices for ROI measures that will be released this summer.

"Most organizations don't have expertise in the whole concept of ROI, partly because in the past, IT leaders haven't been the best business leaders," he adds.

Compaq and New York-based Merrill Lynch both have ROI evaluations at the core of their IT project planning processes, having overcome many bureaucratic and philosophical obstacles to get there, including getting business and IT employees to meet and talk with one another regularly.

"This process has clearly lowered our technology spending on what I'd call nonstrategic investments and redirected spending to more strategic areas," says Marvin Balliet, chief financial officer for the technology group at Merrill Lynch. The financial services company now has business people who will use the technology involved in budgeting and planning for IT.

At Compaq, "IT is targeted more to where the company needs it," says John Buda, vice president of strategy, planning and program management. As a result, "IT dollars are much better spent," he explains.

At both companies, ROI measurement is only part of a much bigger planning, communication and prioritization process. One key difference between the two companies' approaches to measuring ROI is that Merrill Lynch requires a 15% cash return on equity investment within five years for a project. At Compaq, a project's ROI status must be examined after a year, but no set payback level is required.

Even a generous positive return doesn't guarantee that a project will go forward at Compaq. That's especially true if it involves a piece of hardware or software that veers away from the company's technology blueprint and infrastructure.

For example, the use of business-to-business tools for e-commerce by Compaq workers in Asia should conform to the business-to-business tools platform the company uses elsewhere in the world, officials say.

"Setting an ROI return level at a certain amount might mean people don't bring good ideas forward," says Compaq's Kelly Dayan, manager of business opportunities for IT.

Bullish on ROI

For the past three years, Merrill Lynch has required a risk-and-payback analysis for every technology initiative that costs more than $2.5 million. The process is similar to how Merrill Lynch would measure a capital investment in real estate, for example.

This year, there will be 50 to 100 IT projects evaluated, quite a bit fewer than the 230 the brokerage reviewed in 2000, given the restraints of the recessionary economy.

Merrill Lynch launched its ROI methodology three years ago. Before then, every technology purchasing decision was made by technologists. Now, other than technology infrastructure investments, all IT decisions are "made by business people, with technology people sitting next to them," Balliet says.

Standing review committees in each of Merrill Lynch's business units are made up of managers from the business, finance and technology departments who meet monthly and assign low, medium or high probabilities to the expected benefits of a project.

When Balliet started the process in late 1998, there were seven review standards, or templates, that management at Merrill Lynch used to evaluate projects, each one favoring its own business area. Now a single, standard six-page template is used that poses yes-or-no questions to evaluate project success factors.

The document is coupled with a detailed five-page financial report. Questions asked include, "Is the success of this project dependent on another business or technology unit?" and "Have the business functions and the data requirements been identified and agreed to with the business units?"

"The business person and the technology person sit down together, and it's an agreement between the two sides before we start to spend," says Balliet. "The only rule to this is that the process has to be assigned to the business people; it cannot be assigned to the technology people."

At Compaq, a similar combination of business and IT leaders has helped guide internal IT decisions for the past two years, as the company has integrated the management methods and technologies of Tandem Computer Systems Inc. and Digital Equipment Corp., which it acquired in the late 1990s.

Each of Compaq's eight business units has a vice president of IT. They form the core of the CIO's staff. This arrangement began when Compaq's former CIO, Michael Capellas, moved to the position of CEO in July 1999, helping give life to the new method.

Worth the Effort

There are 1,134 internal IT projects being reviewed at Compaq, and no project can remain on the list for more than a year. Compaq uses a global project management system called TeamPlay from Primavera Systems Inc. in Bala Cynwyd, Pa., to help managers use consistent tools to monitor projects in other continents.

Projects valued at more than $500,000 get extra scrutiny from a system review board at Compaq that includes the CIO, CFO and executive vice presidents of sales and service and product development.

The process was "a little painful" during the time Compaq was in the midst of absorbing Tandem and Digital, since there were cultural changes that were a big challenge, says Don Kinsberry, director of worldwide program management. "Getting everybody to contribute to a standard system was a challenge, but it has had a great payback," he says.

Compaq executives believe that the biggest achievement from its ROI methodology has been the alignment of its proposed IT projects with its global blueprint for IT. And Merrill Lynch has seen a similar alignment, as well as a drastic reduction in the number of projects with cost overruns.

Neither company would describe specific cost savings. However, both Marcoccio and Isfahani say the savings probably amount to millions of dollars annually for each company.

Before Merrill Lynch launched its ROI program, about half of its projects ran above cost and never delivered all the promised benefits, Balliet says. Now the number of individual projects that exceed costs is down to 10%. In fact, the process works so well that when there is an overrun, "the managers have to find other places in the budget to pay for the overrun than the technology line," he says.

"We've made it painful for the business people who don't engage in the process," Balliet adds.

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