Achieving 'implementable' ROI

Significantly increase the quantifiable value of your IT initiatives.

by Eric Schoeniger

It seems you can't talk about information technology these days without talking about return on investment (ROI). On the surface, ROI seems straightforward. Put simply, it's the overall benefit you realize from a technology investment—expenses avoided or revenues earned above the cost to implement and maintain the solution.

But ROI can get complicated pretty quickly, and positive returns can be elusive. If you want to consistently achieve ROI, you need to take a holistic approach that aligns the IT initiative with specific business goals, accurately predicts potential benefits, gains buy-in from the affected business function(s) and then both measures and continuously improves the results regularly against specific metrics.

Teradata Magazine spoke with Dan Merriman about "continuous value management" and how organizations can get their money's worth from IT investments.

Merriman is president of Chapin Consulting Group, which helps organizations maximize the financial results of their IT initiatives.

Q: What's the right way to think about ROI in the context of IT?
A: From a financial perspective, ROI involves the benefits of a project relative to the costs, adjusted for the time value of money. It's important that the costs include not only the technology but also the people and process changes involved.

From the larger initiative perspective, ROI involves the effort upfront to define the expected value, plus the follow-on process to measure and improve the actual value after deployment. That should be based on clear metrics and accountability—what I call 'implementable' ROI.

Q: Are there aspects of ROI that are unique to enterprise data warehousing?
A: Enterprise initiatives such as customer relationship management (CRM), business intelligence (BI) and supply chain management are complex projects that involve many interdependencies. Data warehouses are a key part of those solutions.

Interestingly, we see people involved in CRM, data warehousing and BI as being the most aggressive in pursuing this notion of implementable ROI. I think there are three reasons for that.

First is the importance of showing quantifiable results to get beyond the skepticism of the value derived from previous projects. Second, with these complex projects, analysis metrics that show the effectiveness of underlying solution components are very valuable. Finally, people working in data warehousing and BI tend to be analytically oriented. They have a natural competence around analysis and metrics and continuous improvement—the very factors that lead to ROI.

Q: Why is it important to identify business objectives before investing in IT?
A: You need to take both a top-down and a bottom-up approach. You first need to understand your business goals and determine strategies for using technology, people and processes to address them. At the same time, those that are aware of the capabilities of technology need to work bottom-up to determine how the technology, people and process changes can support the strategies. Last, you need to identify value metrics that can measure the effectiveness of the initiative in addressing the priority business goals.

In addition, it's important to define baselines of where you are today along with targets for where you want to be. Defining baselines can require creativity. It can involve evaluating existing systems, or you may simply use the first values that come out of the new initiative.

In the latter case, you might miss some delta between the old way of doing things and the new initiative. But many times, that's close enough because when the initiative is first put in place, it's largely mimicking what was done before. It's only during the first six to 12 months that the people and process changes start to deliver value.

Q: Who should be accountable for IT investments?
A: The question of accountability is probably the primary issue I see with ROI analysis today. In general, the person who should be accountable is the senior business manager of whatever function or business unit will benefit from the initiative and owns the majority of the people, processes and technology that must change in order for the results to be achieved. If you're increasing revenues, then the vice president of sales should be accountable. If you're reducing the cost of delivering customer service, then the vice president of customer service should be accountable. IT plays a very important enabling role in these cases. However, if the purpose of the initiative is to improve the cost-effectiveness of IT transparently to the business (such as replacing a legacy system with a system that is less costly to maintain and operate), then a senior IT executive should be accountable.

Accountability doesn't come into play only at the end of the initiative. Accountability starts at the beginning of the process. When you define the business goals, the necessary actions and the metrics, you need to have the accountable person there to agree to them. Expecting benefit without senior management accountability to follow up, measure and improve the results is a wish—not a plan!

Q: Which business functions must participate, and how do you get their buy-in?
A: There are four partners that must work together toward achieving ROI: the IT department, the business function, finance and the solution provider.

Of the four, the most critical participant is the business function that will be affected by the initiative. You have to gain their support and, most important, their full accountability. If you don't, you probably shouldn't pursue the project. If the business function doesn't want to be held accountable for ROI, then clearly you don't have alignment with their business goals.

Q: How do you factor in potential risks when predicting ROI?
A: In any initiative, there are a number of risks involved—business risks, technology risks, project risks. There are a number of ways to factor these risks into your plan.

One is to increase the size of the discount rate—how you determine the time value of money. Time value of money is the idea that a dollar today is worth more than a dollar in the future, because it can be invested.

Financial benefits that you achieve later in the initiative should also be discounted, and increasing the discount rate is one way of reflecting the uncertainty of future results.

Other popular but more difficult approaches are to apply risk factors to individual benefits or specify ranges of expected costs and benefits, such as worst-case and best-case scenarios.

Q: Why is it important to consider the timeframe for ROI?
A: The longer it takes you to achieve returns on your investment, the greater the uncertainty that you will achieve those returns.

The critical point, though, is when you break even on your investment. The longer it takes you to break even, the more likely it is that things will go wrong and prevent you from breaking even. In addition, all the assumptions you made around business goals and strategies can start to change.

Q: Are there guidelines for how quickly you should start seeing returns on an IT investment?
A: Optimally, you would want to start seeing returns within six to 12 months, though that may not be realistic for a major technology rollout with many interdependencies.

Whenever possible, you should break a large project into phases and invest appropriately to get a subset of the total return in a timely manner.

Q: When measuring ROI, how do you identify meaningful metrics?
A: The only metrics that are truly meaningful are those that are able to show the effectiveness of the initiative in supporting business goals.

The 80/20 rule applies here: 80% of the value typically comes from 20% of the value areas. I advise choosing three to five value metrics that measure the bottom-line impact. Based on my experience, even large projects involving tens of millions of dollars in cost and benefit still come down to three to five key value metrics.

Understand that value metrics are lagging indicators. You also want to be measuring the underlying analysis metrics, which are leading indicators. Let's say you have a sales process that starts with sales opportunities and then moves from qualified prospects to proposals to committed customers and, finally, to contracts. In the early weeks and months of an initiative, you should see an increase in the number of opportunities and qualified prospects. Later in the process, you would expect to see an increase in committed customers and contracts. If you are not getting the expected number of prospects moving from proposals to committed customers, it is very beneficial to know early in the process that you have an issue that requires attention. Analysis metrics can point you in the right direction well before it would become evident with the lagging indicators.

Q: Are there any common mistakes you see organizations making when it comes to ROI?
A: There are what I call the five common sins of ROI: lack of accountability, lack of follow-up, overdependence on industry and vendor benchmarks, justifying a solution rather than addressing business goals and inadequately addressing people and process. (See below.) Avoid these sins and success becomes probable, rather than just possible. T

ROI for IT: breaking it down in five key steps		Five common pitfalls of implementing ROI
1. Define value Define the key business goals; specify the technology, people and process changes necessary to achieve those results; and identify value metrics that measure the effectiveness of the changes in achieving the results. 2. Develop a business case Create a financial model based on expected improvements in value metrics; factor in the people, process and technology costs; make sure a senior manager takes responsibility for each value metric and its targets; and gain commitment that results will continually be measured and actively improved. 3. Implement metric capability Implement value and analysis metrics, technical mechanisms and processes in order to measure and improve the actual value of the initiative. Enable the metric team to monitor the effectiveness of the solution's underlying components and determine the likely causes of any problems that may occur. 4. Measure results Measure and communicate results to senior management, the business function, the IT department, finance and, if appropriate, the vendor. 5. Continuously improve value Utilize the analysis metrics to collaboratively and proactively monitor the effectiveness of the solution; and implement actionable plans for improving results.		1. Lack of accountability If no one is responsible, then no one has the incentive and authority needed to take action and correct things when the inevitable problems arise. 2. Lack of follow-up This results when ROI is predicted and the decision is made to go ahead with the initiative, but the ROI analysis goes on the shelf. Results are significantly limited as a result. 3. Overdependence on industry and vendor benchmarks Industry and vendor data are a great starting point. But you have to be sure your numbers are going into the business case. 4. Justifying a solution rather than addressing business goals This is when you have a great technology solution and you go around trying to find a place where it can be applied instead of identifying your priority business goals and developing the solution that addresses those goals. 5. Inadequately addressing people and process When you make a business case, you need to factor in the cost for the people and process changes necessary to achieve true return on investment. Often, these can far outweigh the technical costs.

Eric Schoeniger is a journalist whose work has appeared in Business Week, Chief Executive and Future.