What are some of the other pitfalls in attempting to measure ROI? The most dangerous is people who rely on average...
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ROI or rely on the ROI another company has had. A sales rep may be selling an application and say the average ROI is 200% or the person down the street got a 300% ROI. There's no such thing as average ROI. You can't compare your ROI to someone else's. ROI is just an indicator of how big a step you take.
Another important problem is [that] many companies rely on benchmark data. Benchmark is good guidance data, but you should never use benchmark data to drive your calculation. Your calculation is just for you and your company. If you use benchmark data, you're going to generate an average ROI based on average companies and an average benchmark, which doesn't tell you anything about what you're going to get.
Never trust a sales rep to do an ROI assessment for you. You might as well trust a car dealer to write the check. It's like handing them a checkbook and saying, "You figure out what I can spend on the car."
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That's maybe the biggest fallacy in the industry on the IT side. There are no changes to ROI. Henry Ford calculated ROI, and he used it to build a fantastic business. Nothing has changed in technology. The biggest mistake that IT people make is assuming there needs to be some new method. There's no such thing as risk-adjusted ROI. ROI is done the old fashioned way, and it has been for years. If Rome wasn't built in a day, there were accountants there they were probably using ROI to assess how to build roads. How do you get IT and finance on the same page?
There are two steps the IT people should all do today. First is to pull out the finance book. If the metric isn't in the index of the finance book they picked up in college, then they shouldn't consider it. The second thing they should do is, after reading the finance book, meet with the finance department and sit down and ask, "What are the metrics you need when you make a decision?" The worst thing you can do is to work in a vacuum. This is where we see the biggest disconnect. Is there a disconnect between the IT side and the business side when it comes to ROI?
The other big difference is the finance folks have typically used ROI as tools to help them make decisions. They don't use ROI in and of itself. Use it as a tool to understand the cost and benefits of a project. In IT, we're looking for numbers to justify a project. The challenge for IT folks is to use ROI and other finance metrics the same way the folks in the accounting office do, which is to say, "How am I structuring my understanding of costs and benefits, and what is the real bottom line impact and risk of this project." Is there a disconnect between the IT side and the business side when it comes to ROI?
Both yes and no. There's some sort of disconnect in that IT folk are still becoming comfortable with the financial side of the house and how to calculate ROI. One of the challenges that some IT people have -- and this is diminishing -- is IT folks will look for the perfect ROI or try to come up with some new metric. They will try to use TCO or Return on Opportunity or something finance people don't feel comfortable with. What IT folks need to do is sit down with the finance people and assess what metrics to use. That's the biggest challenge facing the IT people. They're often in a vacuum, using some consultant metric, while finance people have known and used ROI for years. When it finally gets to the finance people, they don't understand what IT has done. What should organizations be looking for in ROI calculators?
There are two types of calculators out there. There are calculators created for users to help them assess technology and for CFOs to use. Then there are a lot of calculators used as sales tools. There are a number that don't calculate ROI correctly. Most finance people out there know how to calculate return on investment. Most of the companies use either an internal calculator or one from someone like us. For the most part, you should avoid any kind of executable calculator, anything that has macros in it. Any of the quick calculators should probably be ignored. Those are clearly sales tools and won't give you a fair assessment.
If you are looking at a calculator from a vendor, what you should look for is transparency. Can you see all the calculations behind it? Can you make the adjustments you need? Would your finance person trust it? If your CEO wouldn't trust the output of these calculators, you probably shouldn't even consider it during the sales process.There's a growing trend of companies demanding ROI in their SLAs. How important and how doable is that?
It's certainly something that companies can demand in a service level agreement. What companies need to recognize is that ROI is an estimate of what's going to happen in the future. What companies should be looking at is the worst case ROI scenario and making sure with any service level agreements [that] you achieve at least the worst case. What you should have is a bottom line ROI number below which you really want to be careful. A worst case scenario is something I would certainly recommend including in any service level agreement.
We've certainly seen an increasing number of people demanding some sort of ROI within their SLA. Usually what companies do is pick a top metric ROI and ensure the service level agreement contains that. For instance, quick response time may be a key factor or integration with other components. And make sure those key points that drive the ROI are achieved. I wouldn't say it's an across-the-board trend, but it's certainly increasing.Why is it so important for companies to determine an initial ROI measure before taking on a project?
The other key piece with ROI is not just coming up with a number but, if you do an assessment, having a structured understanding of the cooperative benefits. Know what the ROI is going to be, and know -- if the project changes as you deploy it -- what kind of impact that's going to have on the bottom line of the project. Why is it so important for companies to determine an initial ROI measure before taking on a project?
Companies today face a challenge with technology. Technology must prove its value alongside other capital investments in a corporation. Ten years ago, it was obvious that e-mail was an application that would deliver value, whereas today with CRM or supply chain, it's not necessarily obvious whether one should upgrade or replace a current application. A rigorous ROI methodology will allow you to put a technology investment in context with other investments you may have. You treat that technology just as you would any other capital investment.