Roadmap to ROI

Lean budgets call for a careful examination of all IT projects, and making sure you are getting the most return on your investments is key.

[From Supply & Demand Chain Executive, December2003/January 2004] Although the IT spending honeymoon is over, supply chain executives are investing in technology that delivers positive returns by leveraging existing assets and squeezing out costs. There's no one perfect project, but companies that achieve positive returns do so by identifying key business objectives, managing costs and ensuring adoption be it from users, partners, or customers before they write the first check.

They do this by taking a hard look at the costs and benefits of a project and the ROI not as a snapshot to justify a project but as a roadmap for ensuring the project delivers. You should do the same. But first, you should get your arms around what ROI really means.

First of all, ROI is a standard financial measure that every accounting student learns and it means exactly what it says: return on investment. You calculate it by dividing the net benefits by the initial costs of a project. There are a number of other financial metrics finance departments around the world use to evaluate investments, but ROI is the key one for understanding the scope and business potential of a project.

Rules for Smart ROI

Some companies talk about ROI without considering the "I." This often happens in technology marketing when the "I" is painfully large. Unfortunately, without information on the total investment needed to support a project, it's difficult to budget for it, justify it or understand its ROI. If I told you I had an investment opportunity that would give you $10 million dollars in returns, you wouldn't think about committing until you knew how much you had to invest and when you could expect your $10 million and you should make IT decisions the same way.

If a supplier tells you positively its product will deliver a high ROI but can't say what the "I" is, you should walk away or let them know you'll be happy to determine the "I" based on the value their solution provides once you've implemented it.

Some believe average ROI. The fact that a thousand companies have achieved a positive ROI from a solution is great information about how a supplier provides value to some customers but it doesn't tell you anything about the ROI you can expect at your company. Your returns will depend on your technology environment and your business needs and, more importantly, where you are today. A company moving from using the Pony Express to the postal service will likely achieve a great ROI, but that doesn't necessarily mean they will have done a better job than the companies that started using FedEx years ago.

Stay away from tools and calculations that tell you what your ROI should be based on industry averages or survey data. They provide good information about what other companies have achieved, but don't tell you whether Bob in marketing will actually use the database or not. Benchmarking data is just as bad for evaluating projects; your company isn't 100 percent like all the respondents in every way, so you can't use their returns to predict yours.

Some claim ROI calculations are flawed because they are based on assumptions. It is true that ROI calculations are based on assumptions, but that doesn't make them flawed. No chief financial officer (CFO) truly knows how many flights the CEO will take when he budgets for a Gulfstream airplane, or how the changing price of fuel may affect the heating budget for the new building. However, he evaluates each potential investment decision based on assumptions about what is going to happen and looks at different scenarios to see if the company still has a positive cash flow if the worst potential case becomes reality.