DQ CIO SERIES: It’s All About RoI

That IT is the enabler for business is no longer a cause for debate. As IT

morphs into a key element in business strategies, so does the CIO in the

organizational heirarchy. Walking from the backyard of the server room and to

the boardroom, the CIO has been taking some long strides. Today, the CIO has to

divorce himself from the routine humdrum of IT to leverage his expertise and

deliver effective business value. Day-to-day problems like getting the server up

and running, monitoring bandwidth levels and organizing PC repairs should no

longer come to the CIO. Instead, he should concentrate on helping the business

achieve strategic goals using IT. But with responsibility comes accountability,

and many CIOs are grappling with the same. In a slowdown era, how do they

justify RoI on each project, quantify and assess intangible benefits? Debating

multi-pronged business and IT issues faced by CIOs was a panel of experts from

the IT industry and some verticals. On the panel were (from left) Mukt Bihari,

the additional general manager for IS and IT at ITI; N Kailasanathan, CIO

of Titan industries; PK Nigam, head of infrastructure management center

at Hindustan Lever; Prasanto K Roy, chief editor of the Dataquest group

of publications and the moderator of the discussion, Dr Sujit Banerji,

country manager at IBM Global Services; Atul Chitnis, consulting editor

at PCQuest, and B Gopalakrishna Bhat, additional general manager (EDP) at

Bharat Electronics. We present some excerpts from the discussion:

Who decides on IT implementation?

B Gopalakrishna Bhat (Bharat Electronics): At BEL, the IT department

initiates the use of applications. The users also tell us what their needs are

and suggest the implementation of applications based on their view of the

market. Nevertheless, we have the final say in deciding if implementing the

application is worth the investment.

“Yes, it is the IT department’s job to keep abreast of new applications available in the market and keep these solutions ready for use whenever needed” Atul Chitnis consulting editor, PCQuest

Atul Chitnis (PCQuest): When it comes to identifying which department

would drive business changes in a company, it is typically a role any department

within the company could play. It is very rare to see the IT department stepping

forward and causing a change in approach or business decisions within the

company. However, one issue for which most people turn to the IT department for

making changes, is cost cutting. As far as decisions are concerned, I feel that

these things should be user driven. The IT department has to supply the

solution, because users don’t really know what is available. It is the IT

department’s job to keep abreast of new applications available in the market

and keep these solutions at hand. Running a company is the core competency of

the management team. There can be no replacement for this. The IT department

should support these.

Mukt Bihari (ITI): In ITI, it’s been the IT department which has

been taking the initiative most of the time. Of course, when we develop a

software application and implement an ERP, user departments have to be fully

involved. The more involved they are, higher is the success ratio.

Dr Sujit Banerji (IBM): India is one of 364 countries in the world

that IBM operates in. In the mid-90s, IBM worldwide went through a major effort

standardizing platforms. So a lot of the IT initiatives that happened in India

have been determined outside. Key elements have been brought here.

RoI-performance matrix

ITI: There always is pressure to quantify the returns from IT

initiatives, but it is difficult to achieve this in large organizations. For

example, the growth in usage of instant messaging, email, intranet and chat

implementation has been gradual. So, it cannot be justified in terms of cost

cutting. It has taken close to five years for email to become popular and it is

difficult to quantify its benefits. Also, there are other administrative

measures and everybody likes to take credit for the winners among them. Besides,

in an organization like ours, which has over 23,000 employees, it is very

difficult to say who should get the credit.

“An upgradation policy should always be driven by internal needs, not by product launches that may take place in this crowded market” N Kailasanathan CIO, Titan industries

N Kailasanathan (Titan): These are trying times and IT investments are

being looked into more closely than ever before. The best strategy is to find a

sponsor from the business side to back the investments. In cases driven by the

IT department, it is difficult to justify the cost of IT implementation. Take

the issue of increasing Internet bandwidth. We have to struggle to point out the

business returns of such an investment. The explanation is that increasing

Internet bandwidth will sort out the problem of lines getting choked and the

mails not going on time. However, this explanation may not be accepted. So, the

role of a CIO actually involves selling ideas to the management. Of course, if

the business team is able to justify that a particular project will be able to

deliver quantifiable returns in about six months time, we can get the go ahead

with it. You may not recover all the benefits in six months. But at least a

portion of the costs should be recovered and the entire project cost within two

or three years. Those are the kind of returns that companies are looking at

today.

PKR: A solution could be to go the IBM way. The IS department at IBM

is a profit centre. It bills other departments for its services and earns

revenues.

“IT managers are aware that their job ends only when benefits of their deployments are being utilized by the users and impacting on company profits” PK Nigam head of infrastructure, Hindustan Lever

Pramod Nigam (HLL): At Lever’s, the cost of every project has to be

justified. It is mandatory for all projects to be accompanied by an IRR

(internal rate of return) and an RoI calculation. So initially, when we

implemented messaging way back in the 1990s, I am sure the amount to be saved on

telephone bills etc would have been calculated. But today, when the messaging

system is so widely used, I doubt if people talk about RoI and IRR because the

reliability of the system has been proved with time. Of course, now the demand

from the system has gone up a great deal. Email needs to be delivered across the

country within two to three minutes. If there’s an investment to be made in

terms of upgradation of the server, server or virus management, reliability and

quality would be considered.

Investments can be classified into into two areas - infrastructure and

application. Infrastructure investments are predominantly initiated by the IT

department. This is because if these are left to the business managers, then

they would be made only when the need arises. Instead, the IT department needs

to foresee what the business would require and then create infrastructure. We

need to look at the technology available, forecast business requirements and

then develop the capability of the systems. We then try to convince the

management of the need for such an investment. However, if they still want us to

quantify the benefits, we have to.

“The role of a CIO is not just ensuring that tech is handy. He also needs to educate users on what technology they could be using in the near future” Dr Sujit Banerji country manager, IBM Global

IBM: Since we see other wings of IBM as customers, there is a contract

that specifies certain measures. These measures are examined regularly. And they

are typically SLAs, uptime, downtime, etc. However, they could also be

contracts. If the customer is clear on the business oriented measures at the

negotiation stage, these are mentioned in the contract itself. Certain contracts

also contain transaction costs and volumes as against the conventional IT

measurements. So, there can be business measurement clauses in the contract as

well.

PCQuest: There are two kinds of RoI–pre-project RoI and post project

RoI. I am very doubtful whether anyone does the second RoI calculation. The

problem with RoI measurement is that it is a dynamic target. For example, a

client would like his communication cost reduced by half. Let us say it takes

two years to implement the project. After two years, technically he has achieved

the target. In reality, this may not be the case as in the mean time, the cost

of technology, communication as well as bandwidth has dropped dramatically. If

we take the original parameters into account and assume that nothing has changed

since then, he has achieved the target. But if we look at the parameters at the

time of the completion of the project, it may not be so. So, it is not saying

that you would never be able to get a fix on anything, but it is imperative that

the project must take into account that there will be changes down the line.

Intangibles also need to be considered and these are very difficult to quantify.

The management needs to be explained that by saying that these are intangibles

and not including them in the computation, you have actually quantified them,

except that you have put a value of zero.

“If IT cuts back on the time-cycle for every activity in the organization, then we as CIOs have done our jobs well. We can then sit back and relax” BG Bhat additional GM, Bharat Electronics

ITI: I think internal marketing is definitely important. The end users

need to be trained on the functioning of particular applications. It is our job

to train people on the facilities that we create and also sell the idea to the

users for the benefit of the organization.

HLL: IT managers are aware that their job ends only when the system

benefits are being utilized by the users. The project does not end by just

commissioning the software. We demarcate projects into two broad types. The

first type is which business needs badly and the users are clamoring for the

benefits even if we have done a poor job of training and implementation. The

other type of project is one where the IS department has taken the lead. It is

for such projects that we have to ensure that adequate training is given to

users.

IBM: I think whether the technology will be used or not should be

considered right from the beginning. For example, most of the business

applications are used in the business processes. So, right at the point of

initiating the project, we discuss the training requirements and the measures to

see if the system will eventually be used. We also try to include the user

department in the process and check whether they are satisfied with the

functionality. For example, in a CRM implementation, we check whether the

management uses a tool to track opportunities when discussing the same topic. We

believe that it has to be built into the business process so that when the

system is developed and implemented later, it will be used.

Nowadays, the role of a CIO also involves educating users on what technology

they would be using in the next few years. The advantage is that when it is

actually time to implement the solution, users are prepared for it and are no

longer resistant to change. Unfortunately, that is not happening today. What

happens is that you are told one fine morning that you would be using this

application from today.

Bharat Electronics: If we can reduce the cycle time for every activity

in the organization, then we have done our job. For that, we would like to

ensure the accessibility and availability of the human and material resources.

And we can make sure that material resources can be improved by providing

applications like ERP while messaging solutions can take care of the human

resources.

Quantification of upgrades

HLL: The general guideline for PCs is that they have to be replaced

every three to four years. However, we have not gone ahead with the same, as

this would give the users a message that the machine is not worth working on

after three to four years. But when we moved our messaging system from the CC

Mail to Microsoft Outlook, we found that the 286 and 486 machines could not

handle the application. One way to handle the problem is to change one-third of

the machines every year so that we have near current machines in the

organization. Unilever worldwide is seriously looking at thin clients as well.

We would consider this in situations where the requirement of infrastructure on

the client side is very less.

“The more involved users are in the deployment of IT packages, the higher the success ratio...” Mukt Bihari additional GM, ITI

Titan: I would suggest a wait and watch approach before committing to

further upgrades cost. Like with XP, we prefer to wait and see if it stabilizes.

I also feel that the up gradation policy should always be driven by internal

need and not product launches in the market. The management should always

question the user on whether he really needs the upgrade. It should always be

driven by the need to eliminate obsolescence. For example, we had upgraded our

systems in 1999. It has been two years since then and our application is still

working fine. We do not need an upgrade.

PCQuest: From my personal experience, I would say that there is no

such thing as an upgrade policy. I think what we mean is a replacement policy.

The issue is to decide at what point we would like to replace equipment. This

can only be the time when the company says that the equipment that we possess is

not doing the job that we need it to do. Also, if we look at the US market,

corporate America has a very stable application base. They say that these

applications are serving our purpose so we don’t need to upgrade. Of course,

the problem arises when you are forced to upgrade. So the management needs to

invest in technology that would make the investment go longer.

ITI: While going in for upgrades like say Microsoft XP, then along

with the software, we need to upgrade the hardware as well. It is very difficult

to convince the finance department to upgrade 1,500 PCs in the organization.

Since an ERP kind of an upgrade is a much bigger thing as it takes lot of time

to upgrade or even implement ERP.

Messaging in times of cost-cutting...

IBM: I think that you have raised a very important question and a lot

of companies ask whether we should first invest in messaging solutions part as

of the basic infrastructure or should we invest in business applications. In

1996, IBM decided that having a common worldwide messaging system was one of the

key business requirements. We have about 4,00,000 employees spread around the

world and we had enormous difficulties because of a lack of common platform for

people to communicate with each other. So IBM chose to implement the messaging

system while it was doing other business applications. But the focus was on

getting a common worldwide messaging system. It took us about two years to do it

and it certainly wasn’t easy. Our experience at IBM has been that having a

common messaging system does give an enormous business value. When we started

it, it was difficult to quantify the returns because a lot of it was in kind of

soft areas. But fortunately, there was a lot of recognition of the fundamental

value of having a common messaging system, and we could do it. Now it has proved

to be a cost saving factor too. We have been able to cut down our secretarial

staff by almost 20%.

PCQuest: There is no question about messaging being useful, especially

as we see it today on the Internet. It is a major value add. But there is a

negative side to it too. The problem with today’s messaging systems like Yahoo

and MSN messenger is that it becomes impossible to coordinate things when you

are a company of size 200 plus. That is where a structured messaging system

comes in to the picture. But again, at some point you begin to lose the

benefits. Of course one can quantify benefits in terms of cost savings in long

distance calls, but what about the loss in productivity that’s involved? You

could be sitting before a computer screen holding three or four discussions,

which may not lead anywhere.

DATAQUEST Report