Return On Investment (ROI) Analysis

ROI Analysis is a powerful tool in the hands of
a CIO to:
◦ Effectively communicate the real benefits of a
proposed strategic I.T. project (how?)
◦ Resulting in increased funding and increased
funding stabilization for large I.T. projects (why?)
◦ Provides an effective vehicle for building the CIO’s
political capital (why?)
◦ Most of the benefits will be intangible benefits. The
most important thing to remember about assigning
hard dollar valuations to intangibles is: The Final
Valuation of intangibles MUST NOT come
from I.T. !!! (why not?)
ROI requires working with the business units to
identify and quantify the value they anticipate
from the I.T. system
ROI requires working with CFO: the CFO must
approve your analysis or it’s no good
ROI requires the application of a tried and true
methodology for determining ROI (but probably
not a methodology that comes from I.T.)
ROI requires measurements both before project
approval and after project implementation.
No responsible CFO can allow you to proceed
without one (stockholders, BoD, CEO, other
CFOs, and other shareholders in the Corp
Budget would have his/her head)
An IT project competes with other corporate
projects for limited funding—without an ROI
analysis, there is no rational basis for
IT professionals need to participate in the
process—after all, you’re the ones from whom
the CIO gets the data needed for the analysis
IT professionals need to speak the language of
ROI (mostly a language of non-technical
“finance speak”)—see Appendix A in Roles.
The dollar valuations of the intangible benefits
are not credible unless:
◦ The other executives in the company agree with your
analysis and conclusions (this a heavy political and
communications component)
◦ The conclusions are stated in a non-IT language that
non-IT people can understand (this is a heavy
communications component).
From an article in CIO titled: “Don’t Ignore the
Intangibles” by Jack Keen
“Even benefits that are hard to quantify can be an
important part of a successful business case. When it
comes to adding muscle to business cases, there is an
unjustified fear of measuring what are considered
intangible benefits. But a more astute handling of
intangibles — those goals that can’t be easily
measured in dollar terms — can provide a big boost.”
“More than 25 per cent of the value of enterprises is now
based on intangible assets, such as brand image and
market share, according to economists”
“Unfortunately, when business cases are devoid of
intangible analysis, projects vital to the enterprise go
unfunded because intangibles can’t add to the hard
number ROI. Strategically marginal projects showing a
high ROI (often because the investment is small) get the
money. Such misguided project investments can
undermine critical strategic goals, such as
improvement of market share and sharpening of
competitive advantage.”
Intangibles have no worth:
◦ Many things in our economic life are both highly
valuable and quite intangible
 The value of the Coca-Cola logo
 Wal-Mart’s image with Wall Street
◦ Factors with an important worth should be central to
a business case, even if they aren’t easily quantified.
Good Decisions Consider Only the Facts:
◦ “People who claim their decisions are made “solely on the
facts” are expressing hope, not reality.” (Do you agree?)
◦ “A core skill of senior managers is the ability to make
the right decisions in the face of less than factual (for
example, intangible) information. The only issue then is
whether, at the time of decision making, the use of
intangibles is going to be hidden under the table or
brought into the light of day.”
Building Block #1: Avoid controversial
premises entirely
For example, a vision that “we will lead our
industry in innovation” could be a premise for
quantifying the value of a system that enhances
new product development
What are some controversial premises you may
have had to deal with?
Look for other formulas related to the same
benefit area
For example, suppose a formula that calculates
the value of customer satisfaction based on
increased gross revenue is in the business case. If
that is too uncertain, instead calculate savings
based on a reduction in customer turnover,
computing the higher expense of replacing a lost
Be creative at finding sources for information
Interview customers, employees, partners,
suppliers and industry analysts
Search for Internet studies
The reality: informed guesstimates (not “facts”)
drive much of industry’s success.
Some ROI nay-sayers
The future of ROI for IT
Soft-Side Trends for ROI.
There is no ROI in analyzing the ROI on
The best, most innovative IT improvements
have no ROI. There was no decent ROI on
installing the first Wang word processor in the
1970s or the first PC to run VisiCalc in the
1980s or the first Linux server for corporate
Web sites in the 1990s
ROI models fail because of complexity.
ROI is here to stay, but not vender ROI calculators
Bruce Barlag, president, The Hackett Group: “CIOs will
find their compensation directly linked to ROI”
CIOs and vendors will begin to truly collaborate on ROI
analysis -- and tie vendor compensation to achieving
financial returns
David Axson, managing director, The Hackett Group:
“Wall Street analysts, ratings agencies and banks will
begin using an evaluation of IT ROI as they determine a
company's viability, its future prospects, the credibility
of its forecasts and its ability to deliver customer and
shareholder value”
We will find a way to close the gap between projected
ROI and actual ROI and track it in near real-time.
An increasing number of companies are
budgeting for the cost of culture change and
factor that into the ROI equation. Companies will
no longer turn a blind eye to having billions of
dollars' worth of technology sitting unused in
closets due to "adoption resistance" by people in
the company.
Joe Santana, co-author of Manage I.T. (Lahaska
Publishing, 2002)
When it comes to calculating benefits, chief
financial officers have been assessing tangible
and intangible benefits for years, and it's
made an issue only by IT folks and
consultants who know little about finance.
During the next two years, we'll see finance
departments mandating a common structure
and consistency when assessing benefits. If
you're an IT person today, dig out your old
finance textbook and start reading.
Ian Campbell, chief research officer, Nucleus Research

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