Getting Payback, Period

Given todays economic climate, no one wants to buy technology that wont deliver clear returns. Given the time and effort that goes into buying and deploying software, wed like to believe that we make the right choice. The problem is that technology changes, and new solutions quickly surpass existing ones.

If you decided on a dumb terminal sales information system 12 years ago, its likely you discarded it long ago and moved to a Web-based system. But when should you upgrade the Web-based system? If youre effectively managing your IT investment, the answer is when youve gained enough in benefits to recover the costs of the solution. Nucleus believes payback period the point in time after deployment when net benefits equal costs is a critical measure of risk and should be the CIOs most important measure of corporate flexibility.

Payback period is simply the point in time when the total costs of a project are offset by the benefits received. There are a number of key factors that can significantly impact the payback from a project:

• Cost. The greater the investment, the greater the scale of benefits required to produce adequate returns to justify it. That multi-million dollar monolithic CRM project may be helping your sales force, but you need multi-million dollar returns to get your money back.
• Deployment time. The longer it takes to deploy the technology after its purchase, the longer before you begin achieving returns.
• Returns. The greater the volume of returns and how quickly you expect to start achieving them the shorter your potential payback period.

You can shorten the potential payback period of a project in many ways. For example, you can deploy in phases to ensure you achieve returns from specific users, groups, or functions as quickly as possible; or negotiate with vendors to delay payments until benefits are actually achieved.

Payback period is an excellent measure of risk and should be your primary metric for measuring any technology project, along with ROI. In evaluating risk, the longer the payback period, the greater the likelihood that you experience technological or financial risk.

Technology risk is the risk that a new technology will make your existing solution obsolete. When Web-based applications arrived on the scene, many companies that had invested in long-term client server application projects had to abandon significant investment, and the money they had already invested, to turn to these newer applications with greater benefits and lower cost.

Financial risk is the risk that a non-technology factor will influence the application. Mergers, acquisitions, changes in management, and competitive pressures all influence the corporate technology infrastructure and reduce the likelihood that you will get the returns you expect from a technology project.

In addition to risk, payback period is a great indicator of flexibility how stuck are you using an application that hasnt paid for itself yet, while a competitor jumps on the newest best solution? Choosing applications with short payback periods means you can make the case to management that the application that was perfect three years ago, and that cost a lot to purchase and deploy, should be discarded in favor of newer technology. Once youve reached the end of the payback period for a solution, you can continue to evaluate its benefits versus other new opportunities and discard your application once a better one comes along.

Following a deploy-and-replace strategy may be the most effective way for the CIO to maximize ROI for the corporation. Instead of waiting and gambling on whether or not the leading vendors next product version will include the functionality or support they promise, you can deploy a good solution today. Short payback period means you can change direction in the future should a new or better solution arrive.

Managing payback can enable you to maintain flexibility and minimize risk when purchasing new software. Use payback to help critically evaluate potential new technology choices, balance risk, and manage and re-evaluating existing solutions in the light of new technology.