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ROI: Results Often Immeasurable?

Despite a torrent of interest in ROI calculations, truly workable solutions are just beginning to emerge.

CFOs would do well to ask those peddling various ROI methodologies how often their analysis puts the kibosh on projects. With customers increasingly alert to the risks in new IT projects, some ROI consultants claim they have become tougher graders. “If two or three years ago 1 in every 2 or 1 in every 3 were green lights, now it’s 1 in every 5 or 1 in every 10. The eye of the needle is getting narrower,” notes Booz Allen Hamilton’s Dallas-Feeney.

Then again, perhaps the devil is not so much in the details as in the share price. A company called iValue urges an approach to IT portfolio management that focuses on shareholder value. Co-founders Ray Trotta and Christopher Gardner argue that large IT projects should be assessed in the same way that Wall Street assesses companies, with the emphasis on how shareholder value will grow over time. Too often, they say, companies concoct some sort of ROI methodology up front in order to green-light a project with some degree of confidence, then let that project proceed as projects always have — with precious little focus on financial discipline.

They urge companies to develop simulations as a way to assess how and to what degree a project will yield a return over time. Pilot projects provide one form of input, as do market research, conjoint testing (in which customers or users of a system are interviewed about the trade-offs they’re willing to make between cost and functionality), and other forms of analytics.

“ROI is just the latest management fire drill,” says Gardner, whose book The Valuation of Information Technology (John Wiley & Sons, 2000) lays out much of the thinking behind iValue’s methodology. “Companies need to change their entire approach to how they make decisions.” It’s ironic, he says, that Wall Street has imported computer science experts to bring technological sophistication to the value of companies, but IT departments have not tapped financial experts to help assess the true value of IT projects.

The sorts of changes that are needed don’t come easily, and Trotta admits that one impediment to the adoption of iValue’s approach is that “it takes work, and you have to follow through. Two complex disciplines, IT and finance, have to work together continuously.” When they do, he says, the focus on ROI will give way to a more-continuous assessment of value creation.

Clearly what seemed at first blush like a panacea for the costs and complexities of IT projects — conduct an ROI analysis — is rapidly morphing into perhaps the central question for executives involved in IT strategy: how to create a solid framework in which IT spending can be analyzed and capital best deployed. There is certainly no shortage of firms willing to help you take some new swipe at these perpetually vexing questions. That means companies are in the unenviable position of having to analyze how they approach analysis. Yet those that meet this challenge successfully will be well positioned to stem the tide of millions of wasted dollars and untold hours of wasted effort. You may be tired of hearing about “ROI,” but the real discussions are just beginning.

Norm Alster has worked for Forbes and Business Week and is currently a contributor to The New York Times.

Time Is Not Always Money

Improved productivity is one eternal promise of technology. But does the ability to produce more goods and services at the same cost actually translate into bottom-line gains? Often not, say many CFOs, who are wary of productivity gains that don’t result in more goods produced or fewer people on the payroll.

Productivity gains don’t necessarily boost revenue or cut cost, because people don’t necessarily apply freed-up time to work — particularly in the executive suite. Ian Campbell, vice president of research at Nucleus Research Inc., says that, generally speaking, lower-level employees are more likely to turn extra time into more work. “It’s the VP who says, ‘I can close my door and practice putting,’” says Campbell. “If you’re a line worker, there’s no chance to goof off.”

This reality, Campbell says, needs to be factored into ROI equations. Here are his rule-of-thumb calculations on the percent of freed-up time various workers convert into increased output:

  • Assembly-line workers: 95–100%
  • Call-center support: 90–95%
  • Administrative and support help: 70–80%
  • Engineering (technical): 75%
  • Engineering (nontech): 65–75%
  • General staff within a group (marketing, PR, accounting): 60%
  • Companywide general staff: 50%
  • Middle management (large corporations): 40–55%

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