ROI: One Abbreviation, Many Unknowns

by Hinesh Jethwani    Jul 20, 2004

ROI: Industry’s strongest abbreviation that CEOs bank decisions on, and CIOs struggle to define. Every new technology proposal inadvertently ends in an ROI debate between the CIO and the management. CIO’s argue that it is unreasonable to weigh every technology investment in terms of the quantifiable returns that it can offer, as extracting monetary figures from IT projects is not always possible. CEOs have their own issues to deal with, as taking an investment plunge without return metrics in hand defies every management principle that they stand by.

Love it or hate it, you simply can’t ignore the ROI factor. The root problem is that no one wants to be held accountable for a prophecy that doesn’t come true. This has forced many CIOs to shy away from giving crystal clear return metrics to the management, in case they are held liable for projections that fail to live up to expectations. In a typical organization, ROI analysis can be the deciding factor between the life and death of a technology project.

So how can CIOs best ascertain a concrete school of thought on ROI and TCO calculations? Mahesh Khatri has put together an interesting outline to aid CIOs.

Speaking to CXOtoday, Mahesh Khatri, founder director, Kaytek Computer Services Private Limited, lamented, “At the SAP Summit 2004 held in Mumbai earlier this month, there was much debating on the issue of the exact procedure for calculating ROI, but sadly no CIO could come up with a concrete school of thought.”

“Firstly, it needs to be specifically mentioned that an ERP investment is increasingly becoming a business decision, more than just a technology decision. Hence, it is not just the CIO or CTO that will make the ERP technical and commercial decisions. It will increasingly be the CFO and the CEO who will take over the responsibility. International trends highlight an increasing percentage of IT decisions being made by non-IT ‘C’ level executives beyond the CIO and CTO bracket,” explained Khatri.

ROI calculations are seen as a necessary evil by most CIOs, as they involve lengthy complex calculations that don’t always reveal accurate results. So if it’s not the CIOs primary responsibility than whose is it?

“Some of the more enlightened organizations are involving the CKO (Chief Knowledge Officer) in their IT decisions, because IT penetration has increased knowledge levels as we know them today. Many large organizations in the US and Europe have even appointed a COO (Chief Outsourcing Officer) because of increasing outsourcing and offshoring of their IT facilities and investments,” said Khatri.

Khatri’s philosophy for computing the ROI estimation for any IT Project can be summarized as follows:

Incremental return & investment as pertaining to people, technology & facilities should be expressed in amount ($ or Rs) terms over the IT project’s estimated life (except where stated). For all the financial calculations for returns or investments, the appropriate Net Present Value (NPV) discounting should be done.

Breaking up the calculation into a step-by-step process, Khatri suggests that CIOs should adhere to the following:

Total Investment = Money Investment + Time Investment

Money Investment = Initial One-Time Costs + Recurring Expenses

Time Investment = Time (expressed in Money Terms) spent by the organization’s employees utilizing the technologies and making processes work.

(All above investments to be calculated over the estimated IT project life).

Computing Total Return

Total Return = Money Return + Time Return + Knowledge Return + Brand Return

Break up the return into a four dimensional spectrum — there are some benefits which can be immediately quantified. These would be classified as a Money Return. Every automation investment would inadvertently shorten or affect some process time cycle. This return would be classified as Time Return. The benefits of computerization, especially of technology applied to knowledge management, is extremely painstaking to weigh in monetary terms. Many CIOs vehemently oppose this so-called procedure of analyzing knowledge metrics, as they refuse to believe that knowledge can be measured. The balanced scorecard may work for some CIOs in this case, but a few believe that the model is too rigid and its categories too limited to reach any decision precisely. Brand Return is a subset of Total Return, which includes brand awareness, advertising recall, product feature awareness and other markers of brand building that are involved in every campaign that runs online.

Finally, when all the above metrics are in place, proceed to the last leg of calculation:

IT Project’s ROI = Total Return / Total Investment .

Tags: ROI, TCO