IT and Business – Sharing the Spoils of ROI

Ensuring that resources are wisely used is at the heart of maximizing return on any business investment. In the case of IT, there is an ill-conceived notion that it warrants a unique approach to investment rationalization. The reality is that to consider IT investments in an objective manner, one must first recognize that technology is not the end but an all-important means of achieving productivity. Consequently, IT-related investment decisions must be considered in the context of the business purpose, and not by categorizing technology as a “thing” unto itself. The decision must recognize the importance of the following three principles:

• The foundation of a successful return on investment (ROI) outcome is widespread agreement on the quantification process.
• A well-conceived and carefully documented business case is fundamental to delivering the projected ROI.
• ROI means demonstrating a positive contribution to the productivity and profitability of the organization.

As we emerge from the recent economic downturn the perception that the advertised benefits of many technologies are questionable, there is an on-going interest in the ROI on significant IT-related change initiatives. For many years, conventional wisdom has dictated the use of the same corporate valuation metrics to justify IT investment. But as the economy continues to evolve and is increasingly defined by intangibles, it is difficult (and possibly inappropriate) to rely entirely on traditional analytical techniques to determine whether or not to invest. Complicating the situation even further is the continuing evolution of technology and the complex connections among timing and actions in technology, business, government policy, and current events.

There are far-reaching questions and issues that need to be considered, for example:

• Should the IT agenda include investment in outsourcing technologies or services?
• What about replacing all of those PCs that were acquired or leased in 2000, many of them fully depreciated by now?
• Does the future of the business include operations in, or electronic trade with, additional countries – China, for example?
• Are the services of an outside provider being considered to help in managing proliferating applications or complex “interenterprise” business relationships?
• What role will utility computing play in the future of IT?

These are some of the question to be considered when thinking about ROI. It is obvious that the issues these questions address do not “stand alone” and must be considered in the context of the overall corporate strategy.

There are many acceptable definitions of appropriate or satisfactory ROI and an equal number of techniques, models, and philosophies about how it should be rationalized. Because the type of, and reason for, each technology-related investment differs and because the demands of each organization are unique, it is unlikely that a single ROI approach will suit all of them. There are both quantitative and qualitative methods of evaluating ROI that are designed to address the needs of executive committees and potential investors as well as a variety of other stakeholders. The most common approaches are:

Cost Benefit Analysis: assigning a monetary value to intangibles (both costs and benefits) and including these in the ROI calculation.

Information Economics: this is most commonly achieved by focusing on three key value streams – value linking, value acceleration, and job enrichment.

Value Analysis: an appropriate choice if the investment involves a large capital outlay with a promise of benefits that are far in the future and/or based on intuition.

Scenario Planning: this approach essentially presents a series of potential outcomes that can occur if the investment is made, or not made.

Real Options: like scenario planning, the real options technique is used when the anticipated returns may be far in the future.

In addition to these definitions, there is often a significant difference in the payback period in these two categories. As shown in the following figure, the approaches described above have varying degrees of applicability in any given situation.

No matter what economic conditions prevail, in the interests of fiscal responsibility and accountability, investments in IT will continue to be scrutinized. As technology becomes increasingly ubiquitous, yet ever more important, the CIO’s role becomes less about technology and more about its application to corporate strategy, and the need for IT/business alignment becomes stronger. There is significant advantage to having the CIO sit at the executive table; it ensures that he or she is aware of the interdependencies between IT and business and where technology can create competitive advantage. Participation in the interaction at the executive level will no doubt alert the CIO to the financial interests of the other C-level executives. This opportunity for mutual consideration of the company’s overall well-being reduces the perception that the CIO only shows up at an executive meeting to ask for money.