IT Return On Investment: Fact Or Fairy Tale?

By | May 13, 2005

Return on Investment is the buzzword of the moment. But while many vendors in the IT market enthusiastically talk the talk, how many IT investors actually walk the walk?

“Why do we strive to put pound notes on the return we expect from IT investment? Everyone knows that the real reasons for spending money on computers are excitement and fear.”

These are difficult times for investors in IT. In years gone by, CFO’s would sign Purchase Orders for IT with little or no persuasion. Information Technology was seen as a complex but necessary evil and few questions were asked.

Times have changed – these days decision makers are neither impressed not intimidated by technical jargon. Investors controlling IT budgets demand to see indication of a measured return before they approve any proposed spending. Budgets in many organizations are tight or frozen, but IT is as always expected to support the business and run smoothly at optimal capacity and flexibility, with minimal additional investment. Which means that most capital appropriation requests must have supporting business cases but also supporting Return on Investment models. They have to prove their worth.

If you know your business well enough, the justification of the necessity of the purchase via the Business Case is the easy bit. The complications, ambiguity and risk all stem from the Return on Investment side of the equation….

Having quickly realised this, the software vendors are only too happy to help out. Ensuring constant referral to the ROI “buzzword” in their sales pitch, all stress their particular product’s fabulous and unbeatable ROI potential. And of course the ubiquitous ROI calculator has become the salesman’s staple ingredient in their alluring concoction of seemingly fail proof arguments to help sell their solution.

While there are many good ROI calculators available that can truly assist in arriving at sound IT investment business decisions, many are quite simply poorly disguised marketing tools designed to produce the same answer – namely that the vendor’s product on offer will pay for itself in the time it takes to download the online help file – no matter what figures are entered. Buyer beware!!

So how many IT Investors will achieve the ROI promised by the vendors for their investment decisions? And how many will fall for the calculations of riches by the vendors only to find that they have once again been over-promised and under-delivered? And how many will have been seduced by a pretty interface?

Don’t put all your eggs in one basket.

“The cynic knows the cost of everything and the value of nothing.” Oscar Wilde.

So what is the role of the ROI? Measured intelligently it can be used to reveal very useful information in the product and vendor selection process. As a unilateral evaluation criterion, however, it can easily be a misleading point of reference of whether the investment in a product or solution is worthwhile from the wider business perspective.

Over-reliance on ROI as a single evaluation criterion when considering a particular IT investment is a classic pitfall.

When it comes to IT investment, you have to be careful that you do not use ROI calculations – especially those prepared by eager to please vendors – as a single reason to justify what you have already decided to buy. Often buyers are seduced by the “lipstick on the pig” – the seemingly attractive user interface that hides the true and often complex identity of the software underneath. In this situation, any sort of positive result from a vendors ROI calculator is often enough to justify in the minds of the IT Investor the results of the GUI “Beauty Parade”.

When in-house resources are insufficient to undertake a thorough ROI exercise before a major purchase decision, then some vendors are very enthusiastic to help produce reports that go some way to illustrating the savings potential of certain investment decisions. Be wary, but don’t be too cynical however – there are many good software vendors who offer excellent and demonstrable ROI opportunities from their products. But also be demanding – make the vendors go beyond the superficial sales tools and ROI calculators. Ask for proof and examples of their clients who can satisfy the claims. Seek satisfaction. Ask for case studies and reference information. Do your homework – and look beyond the lipstick.

So it’s worthwhile doing then?

Yes. ROI is without doubt, an important tool in IT investment decision making. Organizations wishing to make investments in their IT infrastructure are well advised in taking it seriously.

But for an ROI exercise to be truly meaningful, great care has to be taken to examine and consider a wealth of not always readily available data. A central, consolidated and comprehensive Service Management function, where available, can greatly assist the production of accurate ROI figures.

And while there is no guarantee that a complex IT investment will ever pay for itself and prove to be as valuable as expected, the establishment of intelligent and fact-based forecasts rather than a reliance on wild assumptions and unsubstantiated predictions is crucial to ensuring that scarce resources are invested wisely.

And remember, vendors can be a great help when taken with a pinch of salt, an understanding of the formula and a sober business head that doesn’t just fall for a pretty interface and fast cash promises. And don’t forget the all important fact – an awareness of one’s own responsibility to make the ROI happen.

ROI is a tough nut to crack

So we’ve established that a truly meaningful Return on Investment can be inherently difficult to calculate – but what about once the decision has been made and signatures placed on the dotted line? What about actually realising the expected return?

Often once the order has been signed actually measuring the return on investment (or otherwise) becomes a low priority. For some organizations, the whole exercise was simply a means to an end. Once the purchase decision was authorized, the whole notion of ROI becomes a distant memory. Other organizations seem unable to afford the resources it takes to develop the metrics required in order to measure the success or failure of the investment. Or alternatively they just don’t know where to access the information or even where to start. So in sorts of cases -what happens to the ROI forecasts? – they just gather dust on the shelf.

For those organizations that do try to measure ROI, keeping track of the actual cost of the investment can become an issue. While most IT professionals will agree that it is of vital importance to be aware of the cost of IT investments, there is a disconcertingly low awareness of longer term actual cost figures!

Far too many investors in IT end up spending far more than they had originally budgeted for! One of the reasons for this is that often the initial cost of the software presented to the investor appears attractively low – but add to that the hidden further costs, such as integration and ongoing professional services, and the real cost of the investment doesn’t seem so attractive any more! The best vendors should understand your business and know their solutions well – and because of this be able to offer you a fixed cost solution – for implementation, support and future upgrades.

Forget the Return, what about the Value!

ROI is a very different animal from the VOI – the actual value of the investment. Value of Investment is a much more holistic approach to the benefits delivered and includes, next to the hard cost figures, the soft and difficult to measure benefits such as improved quality, staff morale, service perception and customer loyalty. The task of measuring potential value seems daunting, but any CIO whose team efforts are clearly focussed on a clear set of customer-focused goals should be well placed to come up with demonstrable benefits on which credible decision can be based.

And of course, any vendor worth their salt should be able to demonstrate with real life examples how their solution will provide a demonstrable and rapid VOI.

Paint the Bigger Picture with TCO

So you need to look at the bigger picture. And there are lots of things to consider.

The obvious ones are easily listed: hardware, software and staff costs. But unfortunately it is not enough to justify the expense of a new computer system by simply adding the salaries of those that will be replaced by it. A wide range of other measures should be taken into account.

It gets tricky once one starts to examine the ‘intangibles’, areas such as event call volumes and resolution times, the effort expended by support teams resolving event and system availability figures.

And it becomes positively daunting when one starts to explore the effects of a particular IT investment on turnover and profitability and its indirect benefits like productivity gains, internal service level agreements and customer satisfaction levels and external benchmarks.

How do you for instance accurately correlate increases in revenue to the technology investment? What effect do long project timescales from evaluation to full implementation rollout have on ROI?

The savings that companies can expect from a particular purchase decision depend on a multitude of highly individual and company specific circumstances that can only be assessed by detailed and informed analysis of the existing systems, processes and an in-depth understanding of the business requirements and procedures.

Total cost of ownership (TCO) analysis is a good way to address these issues and instantly gain the respect of financial types in your enterprise. Again, most good vendors should be able to help in this process and provide real life examples of TCO. Looking at both direct costs (e.g., software license fees for a systems investment) and indirect costs (e.g., an increase in corporate cost allocations) over the entire life of the proposed system investment can bring tears of joy to even the most hardened CFO.

No pain, no gain.

So you have done your homework and diligently measured your expected ROI. You are satisfied that you have taken into account all hard and soft variables, intangible benefits and so on. You have signed the PO in the secure knowledge of having made a sound business decision. You can lean back and relax now – or can you?

Even when great care has been taken to calculate a realistic ROI and all other decision criteria have duly been taken into consideration, things can still go horribly wrong. The ROI does not appear miraculously overnight; it still has to be earned.

Whether or not the expected ROI is actually realised depends greatly on the efforts of the investor. Will the assumptions used in the original calculations be realised or is the ROI forgotten as soon as the purchase order is signed?

And it doesn’t end with successful deployment of the tool – there are other factors that need to be taken into consideration. How well are users trained? Is the tool implemented to its full potential? Have the timescales been met? Are appropriate processes in place? Is there enough management support to enforce maximising the potential ROI?

Beauty is only skin deep

The frequent experience of ROI’s that simply do not materialise has led many to great cynicism about the value of this measurement. And again, vendors are fast to catch up. But at the end of the day the ROI is only a spreadsheet; it can be manipulated. And experience tells them that only a selected few in the purchase project team of the buyer can actually unravel the great mystery of ROI calculations. As for the rest, how many will be sufficiently reassured by untested ROI figures and make up their minds on the basis as soon as they get a glimpse of the look and feel of the user interface? Analysts and vendors alike agree: in the first instance a pretty GUI still impresses more than cash promises. But as we all know, beauty is only skin deep…

Leave a Reply