Knowing instinctively that a particular IT project will deliver value to the business isnt enough. To get the project funded, you have to present a solid business case that shows tangible benefits and a solid return on investment (ROI).
If finance isnt a part of your background and experience, dont worry. There are several effective steps to address ROI analysis that demonstrates the value of your project in terms business that leaders understand.
Lets start with the basics. ROI measures how much value the business will realize (the benefits) relative to the investment (the cost). The results are presented as a percentage, and both benefits and costs (if applicable) are discounted to the present value.
The calculation is a simple one that works for any industry. Its the net benefits divided by the cost. ROI is an attractive tool for evaluating IT investment decisions because the model can be adjusted to reflect different investments and value. Consequently, you can customize the analysis based on the metrics that are important to your company. For example, you can include IT cost improvements, such as reduced mean time to repair and faster resolution of service desk calls, as well as business metrics, such as increased revenue, optimized labor resources, risk avoidance and the quantified value of customer retention.
To be effective, an ROI analysis must be sound and trustworthy. Our simple 4C framework helps you ensure soundness and trustworthiness by building an analysis that is credible, conservative, customer focused and comprehensive.
A credible ROI analysis leverages inputs from multiple sources. People within your IT organization know your company well and provide insight into how the business operates. Outside consultants and trusted vendors complement internal analysts, offering insight into best practices unique to your industry, as well as experience with other companies that have tackled similar projects. These outside resources can help validate your assumptions and provide relevant industry data.
To ensure credibility, you need to ask:
- How recently was the ROI model developed?
- Was it certified by a third-party research or analyst firm?
- Has the model has been benchmarked, tested and used with other companies in your industry?
- Has the model been calibrated by post-deployment ROI studies of actual results?
Overly optimistic returns - for example, a promise to reduce IT operating costs by 95 percent while the department retains the same functions and processes - typically fall apart under scrutiny. Extensive interactions with hundreds of organizations reveal that conservative ROI models stand up to scrutiny time and again.
So what does conservative mean in the context of ROI?Listed below are some questions that help ensure a moderate approach:
- Are the cost reductions or performance improvements backed up by documented research or industry standards?
- Are the savings based on realistic costs for your industry and geography?
- Are the benefits phased over time, or are you implying that they will all occur immediately?
- Has project risk been considered?
Conservatism does not mean simply cutting all the benefits and expected improvements in half. It means the analysis uses a thoughtful approach and realistic costs and benefits backed up by industry data and internal research. The advantage of conservatism is that if the actual ROI exceeds your projection, youll be in a far better position with management than if the situation were reversed.
The most effective ROI analysis is based on your unique situation as a company. The following questions help you bring customer focus into the equation:
- Did you receive input from the people who will benefit from the new system or technology?
- Did you rely on industry averages of companies like yours?
- How precisely does the business case reflect your specific situation?
Your results will be realistic if your analysis is based on the business-critical applications your company uses and the actual business impact of downtime for each application. It should, for example, consider your current maturity level relative to the area where you are making the investment. It is unlikely that you are starting from scratch, so you already have at least some capabilities in the area where the investment will be placed. Consequently, your analysis should reflect the incremental value beyond what you are receiving today. This approach shows what you can realistically expect to achieve given the technology or processes that are in place.
The bottom line is that the more the ROI analysis reflects your environment, the closer the projected benefits will be to actual results.
The final element of the framework is completeness. You can ensure that your analysis is comprehensive by asking:
- What does the ROI model cover?
- Is it based on third-party research?
- Has it evolved over the years?
- Are your benefit metrics current?
- Does your model include cost savings as well as the business benefits?
- How can you make sure that your ROI model is all encompassing and truly reflects the benefits that the investment will bring to the entire organization?
Your analysis should reach beyond IT benefits to include expected business benefits the investment can deliver. By closely collaborating with the business, IT can become a change agent as well as a trusted adviser to the business. Situations in which IT proactively sought solutions to satisfy potential business needs, or cooperated with the business in solving existing business-critical issues, yielded excellent company-wide results and tangible business impact. This includes increased gross profit, higher customer satisfaction ratings with the IT services, and IT management becoming an equal partner with business management.
From the cost side, its essential to include all major purchase components software licenses, hardware, maintenance costs, training and consulting, as well as internal costs. A good guideline is to ensure that the costs and benefits are mutually exclusive and collectively exhaustive. In other words, include all potential costs and benefits while avoiding double counting or overlapping of items.
ROI is an integral part of building a business case that assesses the value a project can be expected to deliver. As you build your case, be sure that your analysis stands up to scrutiny: Is it credible? Is it conservative? Is it customer focused? Is it comprehensive?If you can answer yes to all four questions, youll end up with a sound and trustworthy analysis that top management can understand and buy into.
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