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Byte of Success
The Mystery of ROI
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January 2002
(SmartPros)
As an accountant by training, I am inclined to look at the economics of all decisions by habit. Still, the decision-making processes of technology of initiatives have always intrigued me. When analyzing outcomes, I wonder what motivates us to champion specific projects, how do we prioritize among our project opportunities, and when do we define is a good time to commence a new one? Ask the folks in finance in your organization and they will tell you that the key is ROI -- return on investment. Still, is and should ROI be driving our engines?
What is ROI? Every decision we make has alternatives. In business, we tend to determine the best alternative using the financial metric, return on investment, a measure of the highest return for the amount of resources invested in the choice. Since every choice requires expending invaluable and discrete resources to achieve a result, objectively predicting the value of the expected result in the context of the anticipated investment is paramount. And we are pragmatic about the resource limits that we have in our businesses in areas of financing, cash flow, labor, inconvenience during the process, and more -- absolute. ROI modeling gives us a tool to forecast options like whether we should add a truck to our fleet or improve the phone system for customer service. Then after the choice and its outcome is complete, the ROI model can be used to measure the value of our choice.
Since the outcomes of information technology (IT) choices are fairly complex to predict, ROI models are frequently used by vendors to persuade us to buy and by managers to determine organizational IT priorities. At a conference recently, I talked with an analyst from a consulting firm, who creates some of these models, about their usefulness and using them to achieve success. The most telling outcome of my conversation is that the tool is probably often misunderstood and sometimes misused.
Utopic ROI. The ideal of ROI modeling to develop best practices of IT decision-making is noble and useful. Yet, usually it is not held accountable in IT. My consultant acquaintance agreed that few analyze ROI of projects after the fact. In fact, IT ROI modeling is used as a crutch to rationalize and justify the merits of a decision to management -- applying our model and ignoring the reality of the marketplace. There are a few reasons for this:
- The consultant versus reality. Does the consultant or internal person developing the ROI model know the nuances of your business and the elements to success of any IT choice?
- IT versus management. In many organizations, IT is not a team player to meeting corporate objectives, but a supporting player trying to justify its own existence.
- Process, process, process. Outside of the IT department, decision makers are starting to set more realistic expectations of the resources that must be invested during an implementation cycle and costs of any project advocated by IT. IT, sadly, still often does not get it. I suggest that we must continue to train IT about the reality of business process. Unfortunately, with the focus of IT training on technical skills, there is too little focus on process.
- Disclosure. The complexity of some IT choices often means that some critical information is missing that can significantly change the calculated result. Vendors are eager to sell, internal champions are eager to decide and bad decisions are made based on incomplete data.
- Scream du jour / fad du jour. Too many of our decisions are reactive. Thus, sometimes ROI models are used to argue for a result that we already know the decision. Objectivity is out the window before the deciding has even started!
- Analysis paralysis. Other times, ROI is used as an excuse. You will note that I have not defined outcomes as dollars gained. Sometimes decisions must be made and should be modeled to reflect potential for loss. How else can we justify simple things like virus protection software?
- Emotional buying. I have always found the Pet Rock amazing. Grown people, frequently parents, bought into the need to buy Little Johnny an everyday rock that was spiffed up a bit. What would motivate that purchase -- convenience of not having to clean, paint, and decorate a rock from the backyard? And what motivated Johnny to want one? The feel good aspect of some outcomes can overshadow the ROI modeling leading to bad results. On the other hand, emotion is an outcome frequently omitted in ROI models. Do not think more sales; think happier customers.
- Past returns may not reflect future expectations. Models are typically representations of a snapshot of an evolution that is our organizations. Since business is dynamic, expectations and even daily expenditures of resources change without new initiatives. Many new initiatives take months to fully execute. Expectations, requirements, and the model's real results change too. Few of us are adept at really measuring this.
ROI modeling for IT is not an absolute or even nearly perfect tool, but can be useful in our battle to make our organizations successful and profitable. An honest understanding and expectation of this tool will make it more useful. Still, predictive ROI should be tempered with good old fashion common sense.
The classroom - a personal note. After-the-fact ROI has many meanings to many of us. For teachers, the currency of ROI is the life impact of the classroom experience on any pupil. While all of us come into contact with teachers that have provided a potpourri of influence on who we become and what we do, some stand out.
A couple weeks ago, I learned that Mrs. Weill, my third grade teacher, is retiring at the end of this school year. I have not seen her in years. In fact, I disliked the class. But, she was the first to teach me to write and to come to love it. How is that for ROI?
My hat is off to you, Mrs. Weill! Best of success in your retirement!
2002 Smartpros Ltd. All Rights Reserved.
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