An article by Bill Gerneglia appeared recently at myCIOview on the very topic of CFOs and return on investment (ROI) for IT investments.
One of the comments that took me by surprise was this:
"[T]he ROI projections for major IT initiatives are often wrong."
What took me by surprise in this statement was—cynic that I am—that there were, in fact, "ROI projections for... IT initiatives" at all! For, indeed, these projections had to exist before they could be wrong. And, sadly, a great many of the IT initiatives with which I have been involved over the years never had (to my knowledge) any formal ROI projections prepared for them in advance of the project at all. Nor, apparently, did the C-suite have any real interest in preparing such formal ROI projections.
So, let us consider when and why an IT initiative should be considered an "investment" versus the conditions under which an IT initiative should be properly labeled as an "operating expenses."
The "simple rule," I believe, should be this: any IT initiative aimed at maintenance of current operations should be labeled as an "operating expense" (OE) project and monies paid out for such a project should not be subjected to any kind of ROI analysis.
Examples of such OE projects might be:
So, "What's the simple rule for seeing an IT initiative as an 'investment' versus OE?" I hear you ask.
That's pretty easy.
As soon as you hear someone or some department say something like the following, you should be getting out your ROI calculator and putting it to work:
"If we [speaker describes an IT initiative], I'll bet we would [speaker describes how business would be sell more, save money, or reap some other benefit]."
By the way, sometimes the speaker of the above sentence is the hardware vendor, software vendor or a value-added reseller. In such a case the statement probably sounds a bit more like this:
"If YOU buy [or, more subtly, 'invest in'] OUR [product or service], you should be able to [describes business benefit such as, 'save Y amount of money on N operations' or 'ship faster' or 'reduce your operating expenses by X percent'] ."
NOTE: If you hear that statement coming out of the mouth of any of your IT vendors, then for sure you will want to get out your ROI calculator and pin them down to some real hard numbers to be used for post-purchase evaluation.
Remember! In getting to an estimated ROI, it is far more important to be approximately right, because the estimate is never going to be exactly right anyway. So, spending long and agonizing hours trying to pin down a number that will be precisely wrong is a huge waste of time.
You need to estimate five variables to get to your project’s ROI. Pick a period of time for the evaluation period—say, a year, or two years. Then work out values for the following:
Besides the estimated values—or, perhaps in the course of creating the estimates for these values—you should carefully document the 'why' (the rationale) behind each estimate. Write down, as precisely as you can...
For each of these, be as specific as possible. This will help you keep the project on track as you move forward.
For example: if an IT initiative in business intelligence is supposed to increase revenues by X percent, then the "how and why" should say something long the lines of:
"Improved analytics will allow us to segment our market and dynamically identify market segments where carefully constructed targeted offers (so-called "Mafia offers") and value-pricing are expected to add $2.2 million to revenues in the first year and $3.8 million in year two of the evaluation period."
Make the people asking for the "investment" tell you very specifically how the investment is going to pay-off. Make them tell you, whether they are in-house people, or salespeople from a vendor or VAR (value-added reseller). Don't let them get by with "rules of thumb" and other mumbo-jumbo.
Where…
There you have it. Just remember these simple matters…
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REFERENCES
Gerneglia, Bill. "CFOs Require Proof of IT Investment ROI." MyCIOview. MyCIOview, 18 Mar. 2013. Web. 19 Mar. 2013.