When Arinc Inc. makes decisions about technology projects going forward, it begins by looking back. The company, which provides systems-engineering solutions to the airline industry, has developed and started using a new metric: ROIE, or return on infrastructure employed. ROIE is a retrospective comparison of net earnings with yearly IT operating expenses — the networks, systems, and applications that underpin the business — expressed as a ratio, with a higher number being better than a lower one.
“ROIE helps me examine IT expenses in the context of our overall management infrastructure to see if IT has lived up to its promise,” explains Arinc CFO Richard Jones. If IT delivers on that promise, then Jones is more likely to bankroll future technology projects that have a strong business case. “This is a much more effective metric than simply ascribing an ROI to each IT project and then justifying the individual rate of return,” he asserts. “In my experience, when you try to justify ROI, you end up rationalizing a whole bunch of spending without being able to point to a specific result. We have found that an aggregate metric like ROIE is a far more useful indicator of overall IT effectiveness.”
Is ROIE this year’s TCO (total cost of ownership), EVA (economic value added), CBA (cost-benefit analysis), NPV (net present value), or what have you? Without question, this new twist on an old theme underscores the frustrations of finance executives who still struggle to link costly technology investments to tangible results. “If IT costs are going up and are not scaling with our business growth, something’s out of whack,” says Jones. “I wanted some way to continually question our processes and our infrastructure architecture.”
Technology research firms, consultancies, and vendors have built a cottage industry on helping companies quantify the hard-dollar savings and softer productivity benefits of IT projects — and each adviser has its own unique series of measures to justify IT expenses. Gartner appends a long list of “risk-adjusted” metrics to its ROI calculation; while Forrester Research assesses the TEI (total economic impact), including the future operational benefits after the technology is implemented; and Nucleus Research stresses “case-based” analysis and research (see “More Twists on ROI”).
Why tinker with something as solid and simple as good old ROI (net cash flow divided by initial investment)? Because ROI is anything but solid or simple. “It’s as elusive as the Holy Grail,” says Chip Gliedman, a vice president at Forrester. “There’s no GAAP-accepted definition of ROI, no ROI tool that will tell them exactly what to do, no exact ROI model. As [Benjamin] Disraeli said, it’s nothing but ‘lies, damn lies, and statistics.’”
The 19th-century British prime minister was surely discussing another subject on the floor of Parliament, but most CFOs would agree that statistics are quite flexible, for good or ill. “ROI is an in-exact science simply because you’re calculating the future impact of an infrastructure decision, and the future is impossible to predict accurately,” says Jack Heine, a vice president and research director at Gartner. “You can make assumptions on economic cycles and business growth, which do affect the return, but you can’t be sure they’ll prove true.” In fact, few companies actually evaluate ROI after the fact anyway. As Heine says, “If you have a project with a five-year ROI, chances are the IT people who got it going will be elsewhere when the time comes.”