Tuesday, February 12, 2013

IT ROI: Hard Numbers or Fuzzy Logic

IT investment in many organizations is a controversial subject, Statistically seventy percent of technology initiatives don't have a direct measurable effect on the bottom line, as there’re full of opportunities and risks;  IT ROI is more like fuzzy logic these days and cause negative consequences: lack of business respect, mistrust of  project intent and difficulty in entering into the mainstream strategy conversation of the company. So what are the best methodologies?

1. Ask About Business Benefits 

How much of a business benefit will a new IT project create?  As at most of the cases, it doesn’t make sense for IT to try to judge what business does and doesn’t need.

  • Decides Strategic Goals: you have to determine why you are doing it. What strategic goals and objectives are you trying to reach?  IT shouldn’t answer these question by itself. It need invite business to provide information about the potential benefit, and IT brings information about the cost, the ROI calculations should be a joint undertaking. Often such initiatives fail since businesses are not sure how to align their business goals with the initiatives
  • Learn how to ask tough questions such as: How is ROI affected if it costs you 50% more to do the project? What if it takes six months longer than planned and anticipated? What is the cost of not doing the project? etc. both in terms of future maintenance needs and the increased risk of disruption. Having answers to all those worse case scenarios will demonstrate to finance sponsors that you’ve seriously thought through all possibilities. Also, learn about your own company's particular approach to finance. To do this, get to know your company's financial executives and learn as much as you can from them. 

2. Use Hard Numbers Whenever You Can

What are the best methods for calculating ROI? A cost-benefit analysis simply compares a project's cost to its anticipated financial benefit. For many CIOs, they need be able to support essential projects with sound ROI reasoning: How to accurately project the economic impact of a proposed technology. ROI, Net present value, internal rate of return and time to payback are all measurement methods CIOs must understand and use to help business leaders decide whether or not a tech investment is worth making. As all of those metrics are meaningful to CFOs, and IT leaders need to learn how to use them.

  • Return on Investment: Return on Investment tells management how well a project repays the company. It’s a ratio—a percentage—of the dollar amount your company gains from your project over what it initially spent—in simple terms, it’s the company’s payback. 
  • Net Present Value: The Net Present Value equation tells you the dollar value of a future return in terms of today’s money. If your project has a positive NPV, meaning that its value in the future will be higher than it is today, your company should green-light the project. 
  • Payback Period: Time to payback measures how long a project will take to pay for itself., the payback period involves a simple calculation. You take the initial amount of money the company invested in your project and divide it by the annual net benefit. A lot of companies like to do projects if you can get an 18- or 24-month payback, 
  • Internal Rate of Return: Internal rate of return compares a project's anticipated benefits with what the company could have earned on the funds used by simply investing them. Internal Rate of Return (IRR) is perhaps the most complex—and difficult—of the equations to calculate (and to understand, for that matter). Simply stated, IRR is another way to evaluate the value of an investment and to compare alternative investments. 

3. IT Governance Practices & Emerging Trends

The best IT governance solution is to establish a project management office charged with not only managing projects but also doing the cost-benefit analysis and other ROI calculations. The PMO has at least initially worked in partnership with finance to create templates for calculating ROI,

·       Set the agenda for IT steering committee meetings, which are held as often as seemly necessary. The committee discussed project progress, significant cost issues raised by new projects and any other IT issues that rose to the level of the officers' concerns

·       Publish a report monthly or quarterly,  listing the projects’ status, for those that are approved, those that are completed, those in the process and those yet to be started. It included the original cost estimate for each project, an estimated completion date (if in the process) and any changes that caused the initial estimates to be adjusted, highlighting all the major changes in yellow so no one could miss them.

  • Return on Information = Value of Data / Total Cost: At the age of Bid DataThe more insight information provides, the higher the Value of Data and therefore, higher ROI. 
  • Zero Working Capital requires major changes in how an organization functions. One way to implement Zero Working Capital is to have a demand-based organization. Demand-based organizations do everything only as they are demanded, and CFOs and CIOs will move to “zero capital” and transform the IT financial model. LOB execs will be directly involved in the majority of new IT investments; radical changes in IT governance and financial management practices will quickly follow. 
Each organization has specific, measurable goals and objectives they have to hit through investing in IT. Use hard numbers if you can, take IT governance next practices, and follow ‘SMART’ principle to measure result. 


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