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Calculating Return on IT Investment ­ A Pointless Effort?

  • February 01 2001, 1:00am EST

Measuring the return on technology investment has been the holy grail for CEOs and CIOs for the past 30 years. Much effort has been expended trying to quantify the returns in terms of sales growth and cost reduction from the tens of millions of dollars invested in each new wave of technology ­ from mainframes to PCs, to client/server, to ERP, to the Web. Generally, the results have been inconclusive and seem restricted to broad statements about productivity increases being somehow tied to technology investments. This loose, causal relationship has been discomforting for many business leaders.

Many organizations are still investing significant time and effort in complex measurement processes to attempt to track returns. However, some are now be- ginning to question the value of the exercise. For many, the return on IT investment is a pointless question with no meaningful answer.

Why this change of view? The most significant driver has been the ever-increasing integration between technology and core business processes and operations. The pervasive impact of technology now means that in many cases information technology is so inextricably intertwined with people and processes that the identification of specific technology-related benefit streams is of marginal value. During IT's first 25 years, there was still a clear distinction between the technology and the other elements of the business. Inputs and outputs were highly regulated and structured, and the handoff from people to machines was clear-cut. Starting with the PC and accelerating with Web and wireless mediums, those clear boundaries have been obliterated, making it almost impossible to isolate each element.

A secondary influence has been the realization that many technology investments have failed to deliver the expected returns, not because of technology failures but because of poor process design or inadequate training and education. Too many investments have simply automated inefficient processes or have delivered incredible functionality that no one fully understands how to leverage. It is only the combination of the judicious use of technology, optimized business processes and suitably trained and motivated people that in concert deliver the true value of a technology investment. As such, isolating a single input and attempting to measure its impact is akin to assessing the direct contribution of cheese to a pizza.

How should IT investments be evaluated? First, abandon the idea that there are IT projects ­ there are no such things. There are only projects targeted at developing new or improved activities, be they products, more efficient customer service or more productive employees. Therefore, the evaluation of return on investment needs to match the total investments with the total returns, regardless of the nature of each. This leads to the utilization of broader investment criteria than have traditionally been used for IT projects, with techniques such as Monte Carlo simulation, scenario planning and real options being used to assess the speculative and uncertain nature of project returns.

For example, consider the investment in a new customer relationship management (CRM) system. Typically, the expected benefits from such investments are framed in terms of improved customer satisfaction leading to increased retention and/or use of your products and services, together with an improved ability to target customer needs. How-ever, the implementation of the new system is only one element in ensuring full value is realized. Having perfect customer information without adequately trained customer service representatives to interpret and act upon that information or having the insights derived from your CRM system but not providing these insights to your sales force or product development organization prevents you from maximizing return on investment.

Hence, companies are now beginning to value return on investment by addressing three key inputs to any project ­ people, process and technology ­ and then translating those into quantifiable returns related to utility of the products and services you offer and the cost of delivering them. In the CRM example, the investment evaluation would address the following:

  1. Returns to be gained from implementing a new CRM system (technology).
  2. The need to develop a set of processes to communicate to the sales force the insights gained from better customer information so they can close more deals. The insights gained must also be shared with the product development team, enabling them to refine and design better products (process).
  3. Training customer service representatives to both interpret and respond to the new customer information and deliver better service (people).

Once investments are viewed in this context, it becomes easier to define expected benefits and subsequently measure those returns. One other crucial consequence is that this explicitly demands the creation of multiskilled, cross-functional teams with shared accountability and responsibility for success. No longer can users point fingers at IT and vice versa, because the degree of mutual dependency for success is explicit.
We are now beginning to see the development of tools and management processes that accommodate this more holistic and realistic view of the world. For example, companies are using portfolio management to evaluate projects as part of a portfolio of initiatives rather than in isolation and scenario planning to evaluate uncertainty in estimating future benefits under different assumptions. We are also seeing an increased use of project management tools imported from the large-scale construction and engineering sectors where these types of planning and measurement techniques have been standard for many years.

Over the next few years, it is likely that boards and senior executives will increasingly seek to better understand the total expected returns from projects where technology is a major component. This should drive adoption of broader, more business-based evaluation methods. In the meantime, IT professionals can consistently promote the non-technology related critical success factors for maximizing the return on investment at every stage of the evaluation and implementation process.

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