Sizing Up Your Web Payoff

Last year, when Jonathan Wharton, the e-business manager for Canadian energy

producer Suncor Energy, began sizing up the potential benefits of a new package

of Internet software, he didn’t take his supplier’s claims at face value.

The idea was to install Plumtree Software’s corporate Web portal to help

Suncor’s 4,000 employees get information and communicate better. Using a

workbook Plumtree provided to help estimate the return on his roughly $1 million

investment, he initially calculated a $13 million annual bounty. But Wharton

tossed out a handful of items–including a $10 million revenue gain due to

better dissemination of information. It could happen, but he wouldn’t count on

it. He came up with a more conservative number: $2 million. "We’re a

tough audience,: says Wharton. "I needed to have something I could believe

in and could convince my boss to believe in."

Ultimately, the deal was done. Wharton is confident he will pay for his

initial investment within eight months after the software starts running next

year. And while the process of sizing up the potential benefits was bumpy, he

wouldn’t dream of buying software without first going through the exercise of

calculating his RoI.

Wharton is at the forefront of a phenomenon that’s sweeping the corporate

world: the RoI study. In the Internet’s heyday, corporations didn’t demand

proof that e-business projects would save them money or boost revenues. Today,

many corporations won’t commit to new tech purchases unless they see the

benefits spelled out in black and white. So tech companies are devising all

sorts of studies to persuade customers to buy.

As vital as RoI analysis has become to corporations, not all studies are

created equal. And some promise returns that will never materialize. Online

calculators–where a company asks questions about a business and gets answers

based on a formula–give only rough estimates of possible savings. Case studies

of companies that have completed projects don’t necessarily apply to companies

in other industries. A detailed analysis of an individual company’s prospects

should yield more useful results, but even then, variables such as an economic

slowdown are hard to anticipate.

Not surprisingly, RoI studies tend to be overly optimistic. Only 28% of major

tech projects fully meet expectations, according to researcher The Standish

Group. Yet a September survey of nearly 500 corporate information technology

executives by researcher Jupiter Media Metrix showed that 59% of their

do-it-yourself RoI studies forecast gains.

To get dependable assessments, corporations need to drill deep into the

numbers. They have to identify their variable costs, then calculate the money

they can save or the new sales they can log adding technology. This can be a

major undertaking. Consider electronic controls company Cutler-Hammer, a

division of Eaton Corp. A three-month study that led to buying Metreo Inc

software to automate the company’s pricing system involved interviews with 200

staffers. Cutler-Hammer calculates it will take 18 months to pay back the

$250,000 cost of the first phase of the project, started in May. Already, the

time it takes to analyze a new piece of business and come up with a price has

dropped by 40%, to four days.

By contrast, RoI calculators can give rough estimates in as little as 10

minutes. The calculators, often on a supplier’s website, walk a company

through a series of questions, and then spit out a forecast based on the

answers. These estimates are the least reliable of all the ROI approaches. When

Polly Foote, a human resources business analyst at plumbing distributor Ferguson

Enterprises, used the basic version of PeopleSoft RoI calculator last June, she

came up with an estimated 400% return on her investment in human resources

software over five years. "That was unbelievable," she says. So she

spent two weeks coming up with her own calculations–yielding a 77% internal

rate of return, which takes into account the cost of money and other factors.

Ferguson bought the software.

Even though tech suppliers have an obvious bias, they also have expertise

that can help customers size up their products. Intraspect Software, a Brisbane

(California) maker of knowledge management software, two years ago forecast a

$1.5 million return in 12 months on an initial $280,000 investment by customer

Hill & Knowlton, a public relations firm. Ultimately, the return was even

better, $2 million, according to Edward Graham, Hill & Knowlton’s director

of knowledge management. Intraspect led Hill & Knowlton people through a

series of questions about each of their business activities–such as

prospecting for new clients–and helped them estimate exactly how much time

they could save on each piece of the process by using its software.

It’s prudent to get a second opinion, though. Consultants such as Gartner

and Meta Group are the least likely to forecast a false-positive RoI since they

have no vested interest in the outcome. "An external consultant can be your

best bet. They’ve got a proven methodology and can benchmark you against

others in your industry," says David Taylor, research director at Jupiter

Media Metrix.

Doing follow-up studies after a new technology is running can confirm whether

it delivers as promised. Sometimes they even reveal pleasant surprises. Computer

Services Solutions, a $185 million Dutch computer systems integrator, bought SAP

supply-chain software to create online links with its suppliers of technology

gear. Rather than storing computers in its warehouses, it arranged with

suppliers to have them shipped directly to its customers. That allowed it to

close its warehouses, eliminating $13 million in inventories. Then came the

bonus. Through an audit of results by Andersen, CSS figured out it could use the

same software to provide online purchasing for corporations. The result: a

spin-off, Atcostplus, which links companies with their suppliers via Atcostplus’

data center.

RoI studies aren’t an exact science. But in times such as these, measuring

results is a vital discipline. It could mean the difference between running

efficiently and being an also-ran.

By Steve Hamm in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc