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What is “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?)
A Required CIO Skill in Most Competitive Corporations • 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.
ROI Produces the Business Justification to Fund an IT Project • 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 comparison.
Therefore: “ROI Analysis” is a cultivated skill by IT pro’s • 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.
ROI Analysis Requires a Lot of Communication with other CXOs • 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).
The Intangibles-Revisited • 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.”
Some Opening Thoughts: • “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.”
Dangerous Myth • 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.
Another Dangerous Myth • 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.”
Using Building Blocks to Convert Intangibles to Tangibles • 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? .
Building Block #2: Formula • 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 customer.
Building Block #3: Metrics • 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.
A CIO's Guide to the Strengths & Weaknesses of ROI Calculations • Some ROI nay-sayers • The future of ROI for IT • Soft-Side Trends for ROI.
Some ROI Nay-Sayers • There is no ROI in analyzing the ROI on everything • 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.
The Future of ROI for IT • 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.
Soft-Side Trends for ROI • 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)
More Soft-Side Trends for ROI • 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