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  • CFO IT

IT Budgets and ROI

Purse strings are loosening ever so slightly, but that won't slow the quest for better metrics.

As one of many examples, a company called Renovance touts its ActiveROI model as a way to view IT investments holistically, managing them based on three disciplines: architecture, service management, and IT asset management. The company says IT should be managed via key metrics that describe how it enables the business to engage the market.

Consulting firms that built their reputations telling customers what to buy have quickly shifted their focus toward how to buy. From Gartner’s Total Value of Opportunity to benchmarking tools such as The Hackett Group’s Business Value Index, many offerings take traditional ROI concepts such as internal rate of return and net present value, bundle them with proprietary metrics and scorecards, and sell them back as (often patented) methodologies of dizzying complexity.

So much so, in fact, that some analysts forecast a back-to-basics movement as the biggest trend in IT ROI. “CIOs need to start thinking like CFOs when they do financial analysis,” says Ian Campbell, CEO of Wellesley, Massachusetts-based Nucleus Research Inc. “They have to use the basic fundamentals of ROI that go back to Henry Ford. If you ask a CFO to calculate the ROI on an oil tanker, it will take him weeks. If you ask a CIO to calculate the ROI on the Palm Pilot they give the captain of that tanker, it will take months. There’s a basic immaturity there when it comes to understanding finance.” Campbell says that time-to-payback is the single most useful form of ROI, in large part because technology and business needs change so fast that a focus on IT projects designed to pay off in months rather than years is the wisest course of action.

One back-to-basics tool, IT portfolio management, gathered steam in 2003, and many analysts see it making more headway in 2004. The approach treats IT projects as though they were a portfolio of financial investments, with constant reevaluation regarding their value to the company. “Portfolio management will really raise the bar on the accountability of IT to finance managers,” says Gartner’s Grigg. Meta Group’s Sribar says this allows companies to pull the plug on costly projects before they spiral too far out of control.

Talk the Talk

If at its root ROI is an effort to bring more intellectual horsepower to IT decisions, another approach may be to simply enhance a company’s overall finance savvy. A knowledge of basic finance is often lacking in a typical IT department. For example, in a joint study of 130 senior IT executives by the Society for Information Management, the Kellogg School of Management, and DiamondCluster International earlier this year, 74 percent of respondents said they would like to have a strategy to regularly calculate technology ROI, but that 51 percent “have no process to align and evaluate IT investments with business strategy.” And 42 percent acknowledged that their IT staff lacks “sufficient working knowledge of financial concepts.”

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