IT and business teams are beginning to put more effort into measuring the actual business value enabled by their technology investments. Here are three reasons to calculate ROI of IT projects -- and why it's become more important:
- Disciplined business performance management: Whether it's Six Sigma, Balanced Scorecard, Continuous Process Improvement or corporate performance management, senior management teams are increasingly adopting formal, metrics-based business performance management methodologies. As part of these efforts, major IT projects are now expected to directly contribute to the key performance metrics of the business.
- Implementation of IT initiatives in small, phased projects: Companies have steadily moved away from large "big bang" IT projects to series of smaller phased projects, with each phase delivering short-term tangible returns. If the benefits expected in the initial phases don't materialize, the initiative is scaled back or terminated, creating great incentive for demonstrating tangible results.
- Improved tools for performance management: The power and ease of use of the technologies available for defining, measuring and analyzing business performance information have greatly increased. This includes standalone business intelligence and performance dashboard tools, as well as the related capabilities of integrated enterprise applications. The existence of more powerful and easier-to-use tools is leading to greater usage.
Once IT and the business decide they must calculate ROI of IT projects, they should work well as a team to identify the business value of investments, establish the right means for measuring the value, and continually assess and improve the value delivered over time. Following are some key best practices to successfully deliver quantifiable results:
- Define key business benefits in measurable terms: Metrics are the cornerstone of any effort to deliver quantifiable value. As Wayne Eckerson pointed out in "Key performance indicators can help your business grow": "What gets measured, gets done." He also correctly observed that crafting metrics includes a lot of art as well as science. While the process of defining effective metrics for an initiative can be challenging, answering the following questions can help you get started: What are the primary business objectives for the company that the candidate initiative will help address (e.g., reducing the costs of a business function)? Exactly how will the initiative accomplish this (such as reducing the labor and/or business costs associated with certain steps of a related process)? How can the effectiveness of the initiative in addressing the business objective be measured (e.g., reduction in cost per unit of output for the process)?
While establishing metrics for all areas of IT benefit is not practical, it should be a priority for the major benefits of new business-related projects, typically involving 15% to 30% of the IT budget. If you are repeatedly having difficulty identifying business value metrics for projects, you should honestly ask yourself whether your IT investments are truly adding value to the business.
- Ensure that someone is accountable for each metric and its related targets: This is a very effective, albeit often painful, way of establishing meaningful value targets while making sure all of the people, process and technology components of the solution are addressed. Nothing is more effective at driving the "fluff" out of a project than tying the level of measured success to someone's performance appraisal. Accountability should reside with the person who owns the business area related to the business objective identified in step No. 1. Senior IT executives should therefore be accountable for improvements in IT cost-effectiveness, with senior business managers being held accountable for expected increases of revenue or reductions of business costs.
- Support the person who just accepted accountability: By providing the accountable person with key resources, information and guidance to make them successful, IT can be a tremendous asset. IT can add value by helping to develop, measure and analyze information regarding how well the underlying people, process and technology components of the solution are functioning. This information includes such things as leading indicators for anticipating and diagnosing problems (e.g., how much faster or more efficiently certain steps of the business process were being completed, the level of adoption of the automated solution and the relative performance of different user groups).
For years, the focus on calculating the ROI of an IT initiative quickly waned once a project was given the go-ahead. With increased corporate emphasis on performance management and better tools at its disposal, IT now has the chance to work with the business to continually add value to the bottom line.
Dan Merriman is president of Chapin Consulting Group Inc. in Needham, Mass He helps corporate users and vendors maximize the business value gained from major investments in technology. He can be reached at email@example.com.