With ROI, there's no finish line

Think of return on investment as a marathon, not a sprint. Experts say that quick numbers may satisfy CFOs, but real returns often don't come overnight.

Return on investment (ROI) should be looked at as a long-term process that can be improved over time, especially when it comes to software purchases, experts said.

Calculating the ROI for software implementations has been historically difficult. Analysts said this job is further complicated by the fact that ROI is increasingly seen as simply a planning mechanism -- a number used only to satisfy the chief financial officer's concerns before a purchase is made.

But measuring and maximizing ROI becomes easier when CIOs work closely with their company's business organization, finance department and, most importantly, software vendors in the days and weeks following an initial investment.

"Implement the ROI and continue that value focus afterward," said Dan Merriman, president of Chapin Consulting Group Inc. in Needham, Mass.

To continually improve the return on software investments, Merriman said companies should focus on two core metrics. The first is the value of the investment in terms of increased revenue, reduced operating cost and/or improved IT effectiveness. The second is an analysis of how well each individual component of the implementation is performing.

"These metrics are very useful for finding out where there are issues, where there are opportunities for improvement and how to keep growing that value over time," Merriman said.

For example, suppose a large company implements a new software suite to improve cross-selling between divisions. In this instance, the value metric would be the increased revenue that comes from cross-selling, Merriman said. The analysis metric would examine how each step in the cross-selling process improves or degrades after the software is launched.

Ideally, the analysis metric would reveal that sales opportunities have risen along with the number of sales proposals, verbal agreements, qualified prospects and (finally) sales contracts. But if there is a slowdown somewhere along the line, identifying and fixing the problem will be easier because the process is clear.

"You should see a rise in each of the steps of the business process that you work through," Merriman said. "If everything goes up at first but then stops at the qualifying level … that's very valuable to know."

Know your tools; understand your terms

Several tools exist today to help companies measure and hopefully increase the return on IT investments. Columbus, Ohio-based Glomark Corp.'s Genius Pro software allows companies to create customized templates for measuring the value of IT investments. Alinean Inc., an Orlando, Fla.-based ROI consultancy, develops research methods and software applications for continually measuring and quantifying the value of IT investments over time.

Memento Inc. in Concord, Mass., sells a software suite designed to monitor and measure the value of an investment in action. The company said its software compares the performance of enterprise applications to predefined models of application usage, giving CIOs an assessment of expected-versus-actual value.

B.C. Krishna, president, CEO and co-founder of Memento, said it's important to remember that ROI is just one measure of an IT investment's overall value. The true IT value of an investment is derived by looking at several other factors, including the inherent risks associated with misuse of an application. Krishna said other value metrics are subjective and depend on the individual needs of a business.

"You don't really get the full picture if all you focus on is one narrow financial metric associated with an investment such as ROI," Krishna said. "Everybody for some reason thinks that ROI is the Holy Grail of software, and it's just ludicrous."

Alex El Homsi, president and CEO of Woburn, Mass.-based Trilog Group Inc., which makes a development platform for programmers using IBM Lotus Domino, added that when dealing with software vendors, people need to differentiate between business value and IT value, and take both factors into account.

Vendors that sell products for augmenting developer productivity or reducing IT administrative costs will focus on IT value, he said. Software vendors who sell all-encompassing infrastructure software will focus on business value.

Once the product is sold, however, Chapin's Merriman said that vendors have a unique opportunity to truly partner with their clients and help them improve ROI over time.

"The key part of this is the vendors playing an active role, because they're the ones that oftentimes have the real insight into this whole value metric/analysis metric area," Merriman said. "The vendors can't be accountable, but they can provide some very valuable information."


This was first published in June 2004

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