akeaway: Many tech leaders mistakenly believe that it's numbers, and only numbers, when it comes to determining return on investment. Yet, as financial expert Peter Hennigan explains, the value of ROI lies strictly within the process.
An IT ROI analysis should not be viewed simply as a numbers exercise. The true value lies in the collaboration it generates among the business and IT stakeholders.
Think about how an ROI analysis fits into the business decision-making process. Stakeholders take these basic steps when considering investment in an IT project:
- Identify a business issue.
- Examine the business processes related to the issue.
- Determine that process changes will address the issue.
- Conclude that leveraging technology will enable the process change.
- Analyze the IT investment options.
Don’t let step five—analyzing the investment options—disintegrate into mere numbers crunching. To help you identify the values of stepping through an ROI analysis, download our handy checklist.
Why the process tops the numbers
The ROI analysis facilitates activities key to successfully evaluating the investment. Those activities fall into four major categories:
- Including all costs, benefits, and risks: An analysis process that engages the appropriate stakeholders has a better chance of considering all the inputs. It forces people to consider costs and benefits from an immediate and ongoing perspective.
- Appropriate analysis level: A formal analysis process will quickly identify the appropriate analysis level. Analysis at a level that is too detailed results in little more than busywork. If senior management made a strategic decision to implement a wireless communication infrastructure, do you need to complete an ROI analysis on equipping a specific facility?
- Assumption validity: You can never fully ensure that all inputs are reasonable, but a process that engages the appropriate stakeholders will provide some degree of checks and balances.
- Engagement: This is often the biggest benefit. Neither the IT nor business stakeholders can provide all the required inputs, so a formal analysis process ensures that both sides are engaged. IT can provide cost data for the investment in IT resources and ongoing operations, but the business drivers must provide the non-IT cost data. The business owner—not IT stakeholder—should take the lead in presenting the overall business case. If ownership isn’t clear, the process will help identify that issue.
ROI analysis techniques
ROI analysis methods fall into three basic categories. A simple technique is a straight payback calculation based on projected costs and benefits. More financially robust techniques consider the time value of money by applying discounted cash flow analysis to the projected costs and benefits. The most sophisticated approaches apply rigorous modeling and statistical methodologies.
These techniques have spawned a mini-industry of consultants and tool vendors, as shown in Figure A.
Figure A
|
Regardless of the sophistication level, all the techniques quantify the costs, benefits, and risks associated with the IT investment and deliver a return-on-investment metric.
Where the metric fits in
The investment metric is often viewed as the core value of the analysis, but it is only as good as the analysis input. If that data doesn’t reflect all the costs and benefits resulting from the investment, then the metric is suspect. Inadvertently leaving critical data out of the analysis is not uncommon. I’ve provided a checklist of items to consider in ROI analysis.
The data is also subject to manipulation by stakeholders. A savvy manager determined to get a project funded can play with analysis input to generate the most favorable metric. The manager may face reviewers who question the validity of some assumptions, but a convincing presentation and a commitment to deliver the projected results usually triumphs. It’s the rare organization that actually compares results with the original projections.
Don’t forget the true value
The ROI process reinforces the linkage of any IT investment to the business issue that drives it and the business processes it supports. If stakeholders fail to realize the true value of the process, all you are left with is a line item on a projection sheet. Download our handy checklist to help you maximize your efforts.