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All Hail the ROI

As ROI comes back in vogue, finance executives are reemerginig as technology decision-makers; also, contract management software is booming.

Meta Group’s Van Decker says CFOs should “dig into these claims and assume worst-case scenarios. For example, a vendor may claim that better customer service will increase sales by X percent, boosting the top line. Cut that in half, and if you still like the way the numbers come out, maybe you’re on to something.”

Other analysts say that prospective customers should be careful about claims of spectacular ROI on the part of a vendor company’s reference clients. Often those clients have paid little or nothing for the technology, or have achieved the results in a low-cost pilot, but will see the return drop off as soon as they roll the technology out to a broad base of employees.

Many Happy Returns

Companies that don’t want to go it alone can tap ROI analysis services from the Big Five accounting firms and a spate of smaller firms. IT consulting groups have rushed in as well, providing third-party verification to vendor clients or simply consulting with corporate clients to see whether investments will pay off.

While analysts say that a careful ROI analysis can delay technology purchases by two weeks to two months, they also say that the effort pays off in several ways. Not only can companies buy with more confidence, but the discipline that ROI requires also forces companies to specify exactly what they need and determine how to roll it out most effectively.

Mangan believes that this renewed focus on ROI will bolster the CFO-CIO relationship. Frappaolo goes one step further, and says that a tighter rein on IT spending has triggered more communication between CFOs and CEOs. But will it last? “Right now, everything is getting cost-justified,” says Frappaolo. “But when the economy improves, I think we’ll see some return to the ‘old days,’ in which certain technologies are viewed as the price of doing business, so you spend the money and don’t ask too many questions.”

Right now, CFOs are asking plenty.

Software

Contract, Expand

Most CFOs know only too well how arduous it can be to negotiate contracts. But far fewer may realize that the pain doesn’t end once the ink has dried on the dotted line. Common features of contracts, such as contingent discounts, rebates, and tiered-pricing agreements, require continuous–and costly–monitoring. In a 2001 report, Goldman Sachs estimated that companies spend nearly 50 basis points of revenue to track agreements post-deal, while a joint study by PricewaterhouseCoopers and Provato Inc. says that in contract-intensive industries, such as high-tech manufacturing and consumer packaged goods, an average of 12 percent of a company’s total annual costs may be devoted to such tasks.

To the rescue comes an expanding array of contract management software. I-many Inc., diCarta Inc., and enterprise-oriented vendors like Oracle are trying to wrangle contracts into a central digital workspace where common clauses can be reused, new contracts can be automatically routed for approval, and old contracts can be tracked for compliance and analyzed for profitability.

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