Wednesday, February 6, 2008

Information Technology Return On Investment (ROI)

For many years as a consultant, I was well-recognized as an expert in calculating IT projects and their ROI. Companies would pay me enormous sums of money to help justify-- or kill-- IT projects based upon their ROI. I took great pride in my tough, financially-driven mindset when it came to IT investments and prioritization... until one day I realized that it was all a bunch of crap, and I was equally full of the same for selling the concept. It was all snake oil.

Depending on who hired me-- either IT or Finance-- I would cook the calculations long enough to justify the answer that the customer wanted. IT usually wanted a positive ROI to fund an investment. Finance usually wanted a negative ROI to kill a project. The reality is, it's essentially impossible to accurately calculate the a priori ROI for IT projects, and if I see another article about the ROI of an Electronic Health Record project as the basis for either justifying or killing the investment, I'm going to jump out the window. Post facto ROI calculations are much easier to calculate accurately, but even they can be tricky and misleading. Also, it is enormously rare to use a post facto ROI on a project as the basis to uninstall an IT investment, so before you even entertain the idea of this type of ROI, and spend lots of time and money in doing so, you better ask yourself, "For what purpose will the post facto ROI serve? What will we do with the answer?"

It seems to me that the best we can do is recognize the inherently subjective nature of the "Return" and focus carefully on the judicious and incremental application of the "Investment"-- i.e., invest a little, look for tangible value, then invest a little bit more. And the most tangible indicator of value won't be found in a financial calculation-- it will come from the mouths of the customers and users, which is why it's so important to deploy IT projects in small, incremental chunks which show value to someone. If the IT is valuable, people will tell you and you won't be able to pry it from their hands.

Nucleus Research, http://nucleusresearch.com/, is a very good resource for expertise in this area. They understand the balancing act between reasonable business decision making and the inherent inaccuracies of IT ROI calculations. They have a very simple, back-of-the-envelope approach that, with 20% of the effort of a traditional ROI, which get you at least 80% of the value. Nucleus suggests the following criteria for calculating the potential Return on IT-- note that the criteria do not address the Investment.

Breadth: How many users will benefit from the IT? The more the better for ROI.

Repeatability: How many times per day will the IT be used? The more the better for ROI.

Cost: How costly is the task that the IT investment addresses and supports? The more costly the task, the greater the benefit from automation or appropriate technology support. Note that this is NOT the cost of the IT project investment.

Knowledge: How reusable is the data collected in the IT solution for knowledge work? The greater potential to re-use the information in the system, the greater the potential ROI.

Collaboration: To what degree is communication between members of the enterprise ecosystem affected by the IT investment? Communication between employees is costly, so the greater the collaboration component, the greater the potential ROI.

1 comment:

mentalist said...

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