How Companies are Applying ROI Criteria to their IT Spend
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How Companies are Applying ROI Criteria to their IT Spend. Waleed A. Hanafi Chief Technology Officer Failsafe Corporation (Singapore) Pte. Ltd. Applying ROI Criteria to IT Spend. Mismatch between the two worlds of business and IT CIO rarely participates as full member of company EXCO

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How Companies are Applying ROI Criteria to their IT Spend

Waleed A. Hanafi

Chief Technology Officer

Failsafe Corporation (Singapore) Pte. Ltd.

Hong Kong – June 14, 2002


Applying roi criteria to it spend
Applying ROI Criteria to IT Spend

  • Mismatch between the two worlds of business and IT

    • CIO rarely participates as full member of company EXCO

    • Technology managers have grown up from being “techies” and taken on management responsibility

    • Typically report to CFO or other money controller position

    • Focus is on cost control rather than ROI

    • Budgets are debated as percentage change rather than content

Hong Kong – June 14, 2002


Applying roi criteria to it spend1
Applying ROI Criteria to IT Spend

  • Drivers of Investment

    • Maintenance

    • Upgrades

    • Obsolescence

    • Fads

    • Requirements

    • Opportunities

Hong Kong – June 14, 2002


Applying roi criteria to it spend2
Applying ROI Criteria to IT Spend

  • Maintenance

    • Revenues of software and hardware companies have fallen from customer indigestion

      • Spending binge for Y2K is still working through the system

    • Revenue replacement has come from increasing maintenance costs

      • Model came from industrial machinery industry to reflect actual costs required to keep machines in production

      • Now it is just an excuse to collect additional fees

        • Charges are calculated as % of list price, not cost of service

      • % has increased way beyond reasonable level and represents significant portion of IT budget

Hong Kong – June 14, 2002


Applying roi criteria to it spend3
Applying ROI Criteria to IT Spend

  • Maintenance (continued)

    • Microsoft example of a company that has moved from selling software to demanding essentially an annual subscription

      • Creating expectation that firms must upgrade on annual basis

        • Most IT shops cannot handle this level of change, nor do they benefit from it

  • No demonstrable ROI from majority of fees

    • For most SME’s, non-negotiable demand for payment

    • Vendors rely on lousy record keeping at companies to ensure annuity income

      • IBM continues to bill maintenance unless told to stop

Hong Kong – June 14, 2002


Applying roi criteria to it spend4
Applying ROI Criteria to IT Spend

  • Upgrades

    • Originally meant to be release of new features, but with maturity of most software packages, now another revenue generator

    • Can be triggered by OS change, hardware evolution, genuine feature additions

    • Unless rigorous study undertaken, ROI is assumed since upgrade is “compulsory” (see Maintenance)

    • In the “seasons of IT”, this is major and predictable event

      • Staff retention and morale depend on constantly changing IT landscape

      • Staff now treated as contractors have incentive to stay current

        • Structural conflict of interest

Hong Kong – June 14, 2002


Applying roi criteria to it spend5
Applying ROI Criteria to IT Spend

  • Obsolescence

    • Genuine situation arises where cost of maintaining old system exceeds that of introduction of replacement

      • Example – server consolidation

    • Best chance to reset power balance between vendor and company as evolving technology allows replacement of existing infrastructure

      • Small window of opportunity – once new behaviour threatens revenues, pricing is inevitably changed to re-balance

    • Classic business case is appropriate and effective

      • ROI clearly visible IF risk is understood

Hong Kong – June 14, 2002


Applying roi criteria to it spend6
Applying ROI Criteria to IT Spend

  • Fads

    • IT people buy stuff

    • IT people run projects

    • When projects fail, or stuff doesn’t work, IT people run bigger projects

    • When you start hearing about the next great thing, hold onto your wallets

    • ROI is creatively demonstrated by templates provided by the vendor

      • Look for soft costs as justifier – “This product will save each employee 5 minutes per day which equals xx million per year”

Hong Kong – June 14, 2002


Applying roi criteria to it spend7
Applying ROI Criteria to IT Spend

  • Requirements

    • Finally get to what should be number 1 driver

    • Requires in depth understanding of business by IT

    • Must separate “utility” functions from competitive advantage

      • “By spending this money, am I just keeping up, or am I creating something that will distinguish my business in the eyes of customers”

      • Get rid of IT “noise” and concentrate on core processes that drive revenue and profit

        • Desktop PC’s Customer Contact

        • Email Business Process Improvement

        • Network Innovative/Unique Services

        • Security Cost elimination

Hong Kong – June 14, 2002


Applying roi criteria to it spend8
Applying ROI Criteria to IT Spend

  • Opportunities

    • Can I leverage my people and technology to accomplish something that does not exist today?

    • Different from requirements that are driven by business

    • This is where the CIO/CTO adds value

      • Creatively selecting technologies and ideas to produce systems that deliver business value

        • Creation of Intranets to share knowledge

        • Employee self-service systems to cut costs and improve efficiency

        • Increasing customer contact by leveraging technology to open additional channels

Hong Kong – June 14, 2002


Applying roi criteria to it spend9
Applying ROI Criteria to IT Spend

  • Summary

    • Bulk of spend in most IT shops is driven by “what was”, “what is”, and “what must be”

    • To break cycle, need to stop treating IT as foreign to rest of business and to push back on vendor behaviour

    • Rigorous financial analysis is rarely applied to completed projects because of duration, turnover, changing requirements, reputational damage

      • Celebrate the successes and bury the failures

    • Really innovative IT rarely has demonstrable ROI at outset

      • Taking a punt on “what might be”

Hong Kong – June 14, 2002


Applying roi criteria to it spend10
Applying ROI Criteria to IT Spend

  • Summary

    • IT spend is no different from any other investment decision, EXCEPT

      • It depends on creative people to make it work

      • It depends on hungry vendors to supply tools and equipment

      • The industry has an overly high tolerance of faulty tools and equipment

      • The end to end process of creating systems is incredibly complex and dependant on fragile components

      • We don’t apply the same rigor to creating IT systems that we do to physical systems

Hong Kong – June 14, 2002


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