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.

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.

IT investment projects should and can be measured in the same way, using a structured process to evaluate a project and basing estimates for the unknowns on clear assumptions. Do you believe the new portal will make everyone 15 percent more productive? Use a productivity correction factor to develop an estimate of the returns that productivity will bring, include that assumption in your ROI calculation and then test your ROI by doing the same calculation using assumptions about the best and worse case. Then you'll know how sensitive your ROI is to the returns from productivity and how critical it is that you focus your deployment efforts on making sure those returns become reality.

Some evaluate ROI in a vacuum. Quick calculators, pre-sales ROIs delivered by a sales rep and generic ROI figures focus on a number — not on the reality of managing a technology project so its benefits outweigh its costs. A real pre-deployment ROI calculation provides not just a number but also a roadmap for deployment that can be consulted to ensure you're on the road to a project with positive returns. Are the consultants costing more than you budgeted? That's OK if the new figures don't kill the ROI. Was increased sales productivity a big assumption in justifying your project? Then you'd better make sure the sales team is trained and using the solution as soon as possible to keep returns on track. When it's done right, a ROI evaluation can support negotiations with vendors, prevent project creep and be revisited on a regular basis to support an ongoing understanding of technology value.

Some make up other three-letter metrics. Be careful: Analysts who don't understand finance created many of these so-called metrics, and your CFO will laugh if you present them as financial justification for a project. ROI and Payback Period are the key metrics you should be looking at to understand the risks and returns associated with a project. Structured correctly, a ROI analysis takes into account all the unique characteristics of IT projects while being comparable to the ROI from other corporate investments.

Unlike some other technology fads, ROI will not go the way of legwarmers and hula-hoops — and it won't disappear when the next new trendy business book is published to promote someone's consulting services. It's a real financial metric, and it's likely your company has been using it for years to support investment decisions. Use it in a structured way to evaluate IT, and you've done more than strengthen your business case. You've created an action plan you can follow to ensure your technology investment delivers ongoing benefits to the bottom line.

Prospects for 2004

The right decision for you will depend on your current IT environment, developer skills and business needs, but here are a few good investment prospects that will deliver returns in 2004.

Best-of-breed. There used to be a compelling argument for buying a solution suite or applications from the same supplier — they worked better together than a jumble of applications based on proprietary code. Unfortunately, that often meant sacrificing functionality or suitability on one component to stay with the same supplier.

That's not true anymore; standards-based applications and the availability of integration platforms and adapters enable rapid and sturdy integration of solutions. Companies considering an investment in human resources, financials, customer relationship management (CRM) or other enterprise applications should make each product decision based on the ROI from the different technology options. You shouldn't let your decision to buy one supplier's financials package force you into buying their human resources application, or be sold on a suite of components because you expect business value from one piece — judge each component based on its own merits.

Integration. It should come as no surprise that the second key to maximizing ROI after best-of-breed is integration. It's come a long way, and a small investment in integration technology can deliver significant returns — particularly if it leverages existing assets in a way that was financially unfeasible before.

Integrating existing systems is a great way to leverage assets while reducing the cost of doing business — the challenge in the past has been the disconnect between business needs and developer requirements. Let's face it: Developers don't necessarily know that much about the business, and how many business managers can write a line of code? The best integration strategies separate the business process design from the implementation, enabling both developers and business analysts to be more productive because it structures the way they interact during the development process. Using a design tool enables business users to draw, consider and redraw the integration without wasting developers' time writing code that will eventually be discarded. Once the initial project is up and running, business users or developers can make changes without disrupting the entire system. Remember, the goal is to rapidly complete integration projects that support business needs and can be changed over time.

Business Intelligence. BI and analytical applications are another key area where companies can make a small investment to leverage existing data and assets and deliver great returns. Key to maximizing ROI from business intelligence is twofold: First, know what you want to know. Before deploying, you should know what you expect to find that will help you cut costs or increase revenues, or what impact the solution will have on the productivity of those in IT or financial responsible for reporting and analysis today. Second, pick the right tool for the job. There are a broad range of prices and capabilities in the BI market — don't buy a backhoe if you need a wheelbarrow.

Guidelines for Positive ROI

No matter what your technology investment plans are for next year, you can follow some simple rules to get you on the path to a positive ROI:

Use pre-deployment ROI as a road map. Evaluating costs and benefits before you buy technology ensures you know what value you're expecting and that you haven't paid too much. It also provides a checklist for keeping you on budget and on time.

Identify not just key returns, but how you will achieve them. Expecting a 10 percent more productive legal department means little unless you plan to fire 10 percent of the lawyers or get sued 10 percent more next year. You should know what the business goal is, how the technology supports it and what steps you will take to achieve it.

Don't buy until you're ready to deploy. Buying multiple components at the same time may provide some benefits in terms of discounting, but are unlikely to pay off unless you have the resources to deploy them all immediately. Buy individual components as your time and business demands indicate, and negotiate with suppliers for volume discounting if you come back for more.

Deploy rapidly. Don't let feature creep or other initiatives keep you from positive returns. Most projects shouldn't take more than six months to deploy.

There are still good IT investment opportunities that can help you leverage existing infrastructure and resources, cut costs and produce quantifiable returns for your company. Best-of-breed solutions instead of comprehensive single-supplier suites, small CRM tools that actually support business goals, and tools that make integration planning and design faster and more cost-effective are three top areas to consider. Using ROI and payback — and some common business sense — will ensure you make IT portfolio decisions that maximize return on investment.

Rebecca Wettemann is a co-founder and principal analyst at Nucleus Research, a Boston-area firm that works with end-users to study the ROI of investments in technology.