Mind the Returns, Never Mind the RoI

Life is all about cycles, and the IT industry is no exception. First came the

the dot-com era, which saw technology spend zoom recklessly. Then came the

global economic meltdown, which forced companies to clamp down on IT purchases

and implementation. Now, even as some clear signs of a revival have made

themselves felt, the penny-pinching mode continues, forcing organizations to

focus strongly on RoI (return on investment) while planning any IT spend.

"Show me the returns" is the diktat coming the CIOs’ way, and almost

overnight, questioning the RoI has become not just imperative, but fashionable

as well. Admits VK Krishnamurthy, V-P (information technology) at Castrol India,

"The demands on RoI are far stronger today than it was, say a

year-and-a-half ago. In fact, calls for RoI measurement are the critical thing

now–both from the CFO and  from the management–it can even impede

projects that will benefit the company in the long term."

RoI is benefit measured in terms of monetary parameters like profit,

cost-savings or revenue increase that accrues to the organization. For all the

money that has gone into a project, RoI is the means used to assess the returns.

The concept of RoI and its cousins–RoA (return on assets), RoIC (return on

invested capital), IRR (internal rate of return), and NPV (net present value)–are

those that finance executives use to measure performance and evaluate

investments in all things IT. But it is not always advisable or feasible–RoI

was viable when IT was restricted to being an automation tool. But now that IT

has matured and ended up capturing business processes both within and external

to the organization, the sharpness with which the returns can be measured has

blurred. And that’s how the case for RoI in the classical sense has weakened.

Says Krishnamurthy, "IT implementations are no longer standalone

projects–they are actually a part of the larger business purpose for which we

do these things. I think we should measure the RoI of the entire project, not

just that of the technology investment and implementation." The concept of

RoI is not new even in the context of IT, but with multiple largescale projects

happening, the estimation of returns has become complex.

CIOs, meanwhile, stress on the inherent value of engaging in projects that

are strategic and for which RoI measurement may not be straightforward.

Prabhakar Sethi, senior vice-president for e-business at Reliance Petroleum,

says, "Such projects necessarily bring in discipline in operating

processes. The value you get from this discipline results in operational

efficiency, and that’s the RoI."

The closer IT is entwined with core business processes, the harder it is to

calculate the RoI. And with IT is getting more strategic, the chances of being

able to pinpoint the RoI become more and more remote. Assessment of RoI should

be made on a case-to-case basis. RoI is situational, sometimes indirect, and

sometimes derived. The potential for using RoI analysis differs from industry to

industry, service to service, and technology to technology–as does the project

break-even period.

Take the case of airlines. Says MSV Rao, director (IT) at Air-India,

"The industry depends so heavily on IT that RoI from every IT project

cannot be questioned–it is a given for a large number of projects". Thus,

the airline does not insist on calculating RoI from an airline ticket

reservation system. In such an industry, RoI from implementing elaborate

decision support systems like scheduling, fuel management and yield management

is assessed for its direct impact on cost reduction and revenue increase.

Says VK Ramani, president (IT) at UTI Bank, "The RoI from a software

application that helps generate products can be measured in terms of how well

the product sells. RoI for a hardware upgrade to meet increasing transaction

loads can be derived by measuring the loss of business opportunity." Much

of this analysis does not fit into the classic definition of RoI, based purely

on financial factors.

Take the example of "the cost of not investing" in a particular

technology, say in bank ATMs. If the bank tries to evaluate the RoI for setting

up ATMs or a network of ATMs, the verdict would be that ATMs by themselves do

not generate revenue for the bank. But by not having ATMs, the bank is sure to

lose customers and revenue. Another way of looking at the returns that accrue

due to technology investment is to classify it into time horizons. Take, for

instance, ERP implementation–the benefits are set out against time periods,

within three months, by nine months, after 12 months, and so on. Says Ramesh

Srinivas, executive director at PricewaterhouseCoopers, "This helps in

continually justifying the progress of returns on an implementation. These days,

organizations have started scrupulously documenting these facts and it helps in

the RoI measurement when the CEO, CFO, or the board take up the question."

Harsh Kumar, advisor (IT) at HPCL, points out another interesting fallacy in

the traditional method of RoI calculation. "During the appraisal of a

purely financial project, when the returns cannot be quantified, it is put down

as a straight zero–tantamount to zero returns. Such an analysis is obviously

erroneous and kills what may turn out to be a greatly beneficial IT

implementation." In certain other areas like security, high availability,

redundancy architectures, disaster recovery centers and business continuity

plans–all of which are very high on the agenda these days–RoI justification

is difficult.

But the debate on RoI has made organizations RoI-savvier. Says Srinivas,

"Many organizations that have embarked on IT projects like ERP, SCM and CRM

have a very strongly articulated business case, with more realistic

expectations, and there is a constant inquiry into the returns from the

project".

How can you best measure your ROI?



Before going in for a new technology product or embarking on an IT project,

CIOs have to first look at internal factors like alignment to business strategy,

state of the IT infrastructure, corporate culture and other process initiatives.

External information like reference cases of RoI evaluation from same or similar

industries, benchmark studies, TCO studies–all can be looked at to help

present a stronger case for investing in a particular technology. Predictive

analyses conducted internally by a competent team, and comparison of the same

with vendor claims, could bring out potential areas where the technology might

not deliver value. Most of this is to be done during the pilot phase of the

project–when one has not fully committed to a particular technology.

A variety of alternatives to RoI exist and help managers assess the value of

intangible benefits. The ATM example makes a case for "return on

opportunity". Similarly, "return on relationship" acknowledges

the intangible nature of benefits from CRM projects by measuring whether

relationships produce direct or indirect returns to a company. When faced with

budgetary constraints and challenging business conditions, projects that have a

direct impact on cost-savings could be taken up to get a headstart on RoI. Some

examples of such projects are HR-related self-service projects in the

business-to-employee area (B2E), messaging systems, VoIP and the like. From an

RoI perspective, it makes sense to start with information-based internal

projects before moving on to input-based external projects.

Even in cases of large projects, early returns–at least in parts–go a

long way in keeping the top management cooler under the collar. In an ERP

implementation, for instance, the quickest benefit is gained within the first

three months–in terms of smooth month-end closing and visibility in the sales

pipeline. Between six to nine months, cycle-time reduction and inventory

reduction for finished goods starts to happen. After 12 months, the impact is

clearly visible on key impact areas like sales forecasting and its cascading

effect on production schedules, reduction of inventory across the chain, raw

materials, work-in-progress and finished goods.

Internally-funded projects pass the test sooner. At Air-India, certain IT

initiatives like revenue management system and the Web-based booking engine were

implemented using purely internal resources, such projects being easily approved

by the management. In such cases, the RoI is established soon enough. According

to Ramani, "It is erroneous to calculate RoI on the basis of the entire IT

investment. At the same time, it is erroneous to calculate RoI on individual

investments–say a desktop, a server or a software package." He recommends

a simple model to evaluate business benefits on IT investments–core

infrastructure has to be purely seen as the cost of being in business.

Adds Sethi, "Some investments cannot be looked at purely in terms of RoI.

When you are talking about investments in a refinery, investing in IT is part of

the initial investment fundamentally required. Here, the ability of a business

refinery set-up to squeeze the money out of that investment is the key

differentiator."

Various business units, in proportion to the transaction volume supported,

could share maintenance and support costs for the infrastructure. Incremental

investments and the associated support costs for specific technologies or

applications required by individual business units are recorded, respectively,

and measured against the performance of the unit. Yet another class of

investments are those that impact business processes directly. Herein, the

return is measured empirically in terms of increase in efficiency, accuracy,

productivity and other similar factors. Says Sethi, "The application should

be chosen carefully to give returns to customers, returns to shareholders,

returns to yourself and help increase operational efficiency."

Says Kumar, "The method selected to judge a project depends on many

factors–project objectives, degree of uncertainty, risk levels, strategy,

structure, planning process and control systems. This goes for the organization

as a whole, for the project under consideration, and for other projects in the

organization." Strategic match analysis, management vision and competitive

analysis are the three most widely used non-financial techniques to evaluate IT

projects.

So what’s in RoI?



The clear verdict is that traditional RoI calculation based on financial

parameters falls far short of pointing out the merits in a project–large or

small. Most large investments go into projects that are not IT projects per se,

but are IT-driven business projects. That is not to say that technology

investments are to be made without a rationale–but the unholy rush towards the

altar of RoI and sacrificing technology investments that add strategic value to

the business should be avoided at all costs. CIOs agree that the value that

comes out of every project should be assessed pre- and post-implementation for

tangible and intangible benefits. This should serve as a guiding point for

future investments.

But whose responsibility is it finally to deliver RoI on IT? The consensus

amongst CIOs is that it is a joint responsibility to be shared by the IT

department and the top management, for these make up the

"stakeholders" in any project.

Says Sethi, "The IT guy only tries to enable the process. But the people

who find the returns are the business people themselves, not the IT guys. If the

business guys do not see the return in the first place, then they need not

invest in IT–and nobody from IT can force them to do so." Adds

Krishnamurthy, "You cannot remain confined to your own area, you have to

understand how the value will get delivered. It is more so because you are a

member of the standing committee or a board member or part of the project team.

You shoulder the responsibility to make sure that things happen and oversee that

other people play their part in ensuring that the targeted results are

delivered."

The bottomline–large IT-driven initiatives have to be steered by the top

management, often the CEO himself. At the end of the day, it is the entire chain

that is responsible for the returns.

Easwardas Satyan in Mumbai