Hitting Return

In these trying economic times, CIOs must put on their accounting caps in order to create a meaningful business case that justifies their technology purchases. And while everyone involved in IT spending initiatives crunches serious numbers in order to reach that elusive return on investment (ROI) number, more often than not it is usually an unattainable goal. Instead of focusing on hard numbers to calculate ROI, industry experts suggest developing a new set of metrics to validate a technology investment.

Points of Return

AMR Research offers the following points when using an ROI assessment tool from a vendor:

A clear conflict of interest exists between vendors providing an ROI projection on their own products. Has a vendor advised a user not to pursue a project based on marginal ROI projections?

To get a true measure of ROI for a new project, existing processes will need to be redefined and data organized to support it. Many ROI tools do not measure risk based on readiness, because that would slow the sales cycle.

Users need to evaluate ROI assessments based on the risk the vendor is shouldering. In fact, their implementation methodologies are rarely based on achieving the business case, instead focusing on merely getting the system live.

The Board Responds

CGT asked its Board Members how they judge ROI from a non-monetary standpoint. Besides revenue, what are the other benefits to look for and expect when investing in new technology? Responses vary and touch upon points of regulatory change and asset utilization to total shareholder return.

"Ultimately it is a judgment call although we sometimes use a structured framework as assistance," says the vice president of a food and beverage manufacturer while the Chief Information Officer of a personal care manufacturer believes "regulatory changes and a clear need to sustain the business" are of top ROI concern.

Protecting Assets

"Obviously, sales growth and cost savings (marketing, personnel, etc) can and should be measured via a monetary calculation," says the Vice President of IT for a household care manufacturer. In addition to those factors, this Board Member also considers asset utilization and productivity/efficiency gains as important ROI factors that should be considered. "This can range from creation of new business models to process improvement measures (more work done per resource unit)," says the Board Member. Overall, this Board Member focuses on "creating value" which is defined as "increasing total shareholder return". This vision is achieved through a number of key measures:

Sales growth

Marketing expenditures

Productivity spending

Other cost reductions

Money Matters

Monetary calculations are also looked at first and foremost according to the Chief Information Officer of an appliance manufacturer.

"In looking at the return on an IT investment we start and give the highest priority to hard dollars: Cost savings first, incremental revenue second," says the Board Member. "We then look at soft dollars that relate to revenue retention and cost avoidance."

"We look for improved effectiveness, efficiency, intelligence and visibility," says the Senior Vice President of a fragrance manufacturer. Additional ROI benefits this Board Member strives for are the ability to facilitate real-time analysis, improved forecast accuracy and improved management of business and sales plans.

The Cost of Doing Business

In addition to the return of hard dollars on any IT investment, it also makes sense to understand the cost of maintaining a technology investment.

"I think it important for senior management to be aware of the cost of doing business in the technology arena," says Jeri Dunn, CIO of Tyson Foods and CGT Edit Advisory Board Member. "The infrastructure is not unlike the plumbing or wiring in a plant and must be maintained and upgraded or the plant won't run."