The Trouble With ROI

Of all the techniques that measure the rate, size, and time ofthe benefits of IT investment, none has achieved a more esteemedstatus than the ROI method.

BY MAREK JAKUBIK

Being a sound and widely accepted financial yardstick, ROI(return on investment) also is a strongly intuitive measure thattells us where to invest. Since the corporations capital can beinvested in a variety of wayspeople, training, new products, newterritories, technology, etc.organizations rightly feel compelledto know which of the choices would give them the best return. ROIcan do exactly that. Furthermore, as a financial and comparativemeasure, the ROI formula is simple: benefits divided by investment.No wonder, especially following an era when technology investmentsoften were driven by buzz marketing and me-too attitudes, thesolid, tangible nature of ROI attracts so many followers.

Yet many businesses find the key promises of ROI an elusivetarget. While the concept is widely accepted, organizationsexperience difficulties implementing itespecially for the larger,more complex IT projects. Moreover, many of the issues anddifficulties tend to be more pronounced within small and midsizeenterprises due to their limited budgets and narrow access tospecialized talent.

First, lets take a look at the nature of those difficulties andthe key reasons for their existence; then we can offer practicaltips for working through and around those problems. We will focuson two areas where most of the hurdles exist: making ROIcalculations credible and enforcing the benefits. For ROI to be aneffective law, companies need a means to make it a fair, practical,and enforceable law.

Credibility Threshold

An initial step in establishing credibility is to make theinitial ROI calculations objective and believable. It is here wherethe first cracks appear, as organizations fail to invest enoughtime and resources to reach the credibility threshold. Theirefforts fall short for reasons that are objective (getting theright input data for large IT projects is inherently complex) andcultural (organizations lack the proper structure to produce anobjective analysis).

Making Things Simple Takes
A Lot of Work

Measuring ROI is no exception. ROI as a single measure isbeautifully simple; however, developing it is not. The techniquesapplied to calculations are well understood and can be usedcompetently by almost any accountant. However, it matters notwhether a company uses the accounting rate of return (ARR), cashflow analysis, or much simpler payback period method as a measuringstick. The problem lies elsewhere. The critical and most difficultpart has to do with the uncertainty of future assumptions.Inevitably, they depend on a wide array of events and trends suchas global and domestic affairs, the economic environment, strategicplans of the company, and in the case of technology investment, onhighly unpredictable technology change patterns. Since no singleperson in the company is ever knowledgeable in all these areas, theonly solution is to assign a team of expertsan expensive,time-consuming obligation. Failure to make such a dedicatedcommitment is the first blow to the credibility of ROIanalysis.

A colleague at my firm, managing director Vladimir Orovic,offers this caution: This cannot be done on the back of anenvelope, as many organizations attempt. The complexity arises fromthe interdependency of business drivers and IT capabilities andneeds that ultimately determine the ROI, and this combination ishighly unique for every organization. An expert team typicallymight execute a two- to four-week engagement to look at the stateof the business, changes driven by technology implementations, andways to track those changes. Shortcutting this process and usingrules of thumb almost always yields wrong results.

Lies, Lies, and ROIs

Concurrent with committing a skilled team to the analysis,companies must protect against inevitable competing agendas andbiases. Two parties play principal roles: the Business Unit (BU),which is a primary recipient of the investment, and the IT unitresponsible for delivering and managing the solution. Such divisionof roles clearly delineates responsibilities for both elements ofthe ROI ratio: BU responsible for delivering the numerator side(benefits) and IT responsible for delivering the denominator(investment). Making such a separation of responsibilities clear isthe first necessary step. The second has to do with managing theintangibles of the analysis. To avoid the highly probable skewingof the assumptions toward whatever end consciously orsubconsciously fits the parties goals, the process needs anindependent arbiter. That function, in most organizations, shouldbelong to the CFO. As a result, the three partiesCFO (arbiter),business VP (beneficiary), and CIO (supplier)create a basicstructure within which they collaborate to deliver the bestpossible analysis.

Now that we have resources assigned, rules defined, andaccountabilities clarified, lets look at the other area ofcorporate governance that causes the ROI process tofailenforcement.

Swinging the ROI Stick

Some aspects of enforcement are easy, and most CIOs know thatall too well. Within three to nine months, most projects will startgiving off either a fragrance of success or a stench of failure.Slipping project schedules and bulging budgets are tough to hide,especially when everyones focus and attention still is on theproject. However, since IT is responsible for the ROI denominator(in this case, cost), it is all fair game. To those CIOs who maywant to debate this point, I only can offer the old adage: Do notpromise what you cannot deliver. This aspect of a corporate cultureand behavior is well understood, and I see no need to elaborate.Instead, lets turn our attention to a hidden and often biggerproblem that still lies in the future.

The Forgotten Numerator

This is where, over time, a large number of ROI-based decisionslose (whats left of) their credibility. The upfront commitmentsmade by the business that defined the benefits of automation oftenare neither monitored, verified, nor enforced. The reasons arepartially objective. First, the benefits of automation have a longaccrual timelittle to do with technology itself, a lot to do withpeoples abilities to absorb the change. We tend to compound thatproblem by making overly optimistic ROI assumptions with respect tohow quickly an organization can derive the value from aninvestment.

Second, passing time does make human attention wander away.Decisions made two years ago rarely retain a lot of focus.Moreover, what is there to do when one or more of the originaldecision-makers has left, retired, or moved on? Who is to be heldaccountable for the subpar results?

For a variety of reasons, one of them being lack of politicalclout and astuteness, it often means the CIO. Such a broken andinherently unfair process produces cynicism and negative attitudesand gives IT ROIs a bad rap. But there are ways the scenariosdescribed here can be avoided or, at least, circumvented. Most ofthem are under the CIOs control.

How to Protect the CIOs Neck

1. Rely on methods and metrics that fit yourcompanys style and capabilities. Predicting the outcomes and thentranslating project costs and benefits into cash outflows andinflows can be tenuous at best, and many costs and benefits aredifficult to quantify. Develop a clear consensus with yourexecutive team as to what works and what doesnt. Your CFO should bethe best guide in that process. Engage him/her as much as youcan.

2. Keep it simple, or alternatively, findexperts to help you. The experts may live inside your company(hint: talk to Finance). If you cant find them internally, get themfrom the outside.

3. Insist and build consensus on basic pointsof process discipline. Engage the Executive and make him/ her agreemaximizing returns on technology investments is a collaborativeprocess where everyone shares risks and rewards. Insist allresponsibilities be clearly defined.

4. Complement ROI with measures thatdemonstrate a continuity of improvements. Here are someexamples.
Employ ROA (return on assets) to measure the companys ability togenerate profits from the IT asset base. Use ROA to show you candeliver more with less.
Measure key business transaction unit costs; an excellent metric tocompare with your peers.
At the macro level, monitor the overall productivity ratio, e.g.,the revenue per employee divided by an average salary peremployeeagain, a very good apples-to-apples measure for comparingwith your peer companies.

True Value of ROI

An IT ROI analysis never should be viewed as a numbers exercisethat produces a line item on a corporate projections sheet. Itstrue value lies in enforcing discipline and collaboration withinand between the business and IT stakeholders. Treated in suchspirit and together with other soft metrics, it genuinely andpositively can influence business confidence in IT.

Marek Jakubik, a former CIO of Zurich Financial and PitneyBowes, is a co-founder and managing director of the InsuranceTechnology Group (www.insurancetg.com). He can bereached at 416-214-3445 or [email protected]

CIO Chronicles focuses on issues of concern to midmarketinsurers. Its content is the responsibility of the author. Viewsand opinions are those of the author and do not necessarilyrepresent those of Tech Decisions.

CIO Chronicles focuses on issues of concern to midmarketinsurers. Its content is the responsibility of the author. Viewsand opinions are those of the author and do not necessarilyrepresent those of Tech Decisions.