None of my developers were able to help either. You may find yourself in a similar bind when upper management requires an ROI figure before giving your project the green light. The task may seem difficult, but don’t give up yet.
ROI offers tremendous leverage and benefits in establishing the business case to justify technology initiatives. However, it is just one of several financial measurement tools that can be used to support an investment decision. For some IT projects, it is nearly impossible to express the benefit in numbers. However, the return can be significant, albeit of a nonfinancial nature (e.g., competitive advantage, product differentiation, customer service). Executives today are therefore deeply interested in ROI. In the majority of cases, the returns will be substantial—if the project is deployed correctly.
The first step in justifying the value of IT is to perform an ROI analysis of planned projects. You must evaluate projects based on costs, savings, strategic benefits, and risks in order to determine the most advantageous initiatives for the enterprise. Executives want to know which projects will contribute the most to the strategic and tactical business goals.
I recently met with a group of fellow project managers to discuss IT ROI. The discussion was interesting in that the project managers I interviewed could tell me how much they spent on their technology initiatives, but very few could actually say what that investment returned to the enterprise.
IT projects are inherently risky, and many fail to deliver on stated business objectives. Every organisation has limited resources and more to do than the budget will allow. Already squeezed on their spending allocation, executives are typically left with a meager 10 percent of their IT budget for innovation—once operations, maintenance, upgrades, and migrations are paid for. So projects that fail to deliver value are a major source of contention within organisations. That is why so much emphasis is placed on high-quality project management and why project managers really need to pay closer attention to ROI.
In fact, leading industry researchers are saying:
- 79 percent of companies now require ROI analysis to be performed on IT investments (Ernst & Young, 2002).
- 60 percent of all technology spending is controlled by business or functional managers and 40 percent by IT organisations (Gartner, 2002).
Project managers and vendors responsible for enterprise projects say that they’re getting better at establishing organisational goals for projects and avoiding the scope creep that is so common in most software/hardware implementations. Their projects actually delivered expected ROI numbers, such as increased revenue and lower costs.
The financial people are the ones most interested in ROI. They go by various titles, such as CFO, financial accountant, or project manager. Regardless of title, they’ll examine project expenses and trends to determine whether it makes financial sense to proceed or simply cancel a project. If you’re managing a team of developers writing 30,000 lines of code on a specific project that doesn’t justify a solid return, your CFO may cancel any financial backing. A case in point is when the economy slowed down, one of the first casualties were projects with poor returns. Had those projects shown a positive ROI, I’m confident they would have survived. Unfortunately, as I’ve experienced myself, the majority of executives and project managers cite that they and/or their teams do not have the tools, training, or facilities to communicate the ROI and value of IT effectively. Yet, it’s that very discipline that will hold the project manager to account for and deliver on expectations. Understanding and respecting the ROI of IT projects will keep you honest.
Reasons for determining your ROI
Here are leading ROI advantages:
- It’s a great selling technique for senior executives.
- It allows you to set investment screening thresholds (e.g., considering only projects that deliver ROI of at least 190 percent).
- It enforces an understanding of the top/bottom-line business impact of the investment, since it is impossible to complete an ROI analysis without understanding the potential impact on cost and revenue generation.
- It facilitates investment prioritisation by making a project-to-project comparison between investment options, letting stakeholders focus on the intangible benefits separately.
- It brings discipline on the part of vendors and decision makers to support business impact claims by taking a more quantifiable approach to business justification.
- Lastly, it enforces accountability on the part of the project executive for the success or failure of the project.
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