Minnesota Technology Magazine - Winter 2007
Payback Time
10 ways to ensure that you get a return on your next IT investment.
BY DAN HEILMAN
Dan Heilman is a St. Paul-based freelance writer.
When an individual buys a piece of technology, it’s understood and accepted that it will begin depreciating as soon as it’s out of the box, and will likely never pay for itself in tangible terms of dollars and cents.
Most companies can’t afford to look at technology so casually. The slice of revenue taken up by tech expenses for the average business is around 10 percent. Having that much money disappear due to poor planning and follow-up can cripple an operation, so businesses have had to develop ways to not only justify tech purchases, but to try to make them pay for themselves in productivity, new business, and other positive developments over time.
ROI is a concept as old as business itself, but only recently has it begun to become commonly associated with technology expenditures. As a result, there is no foolproof way to guarantee a reliable level of IT ROI. It depends on numerous factors, including the size of your business, the technology deployed, what your expectations are, and much more.
The three ways in which an IT project’s value are most often measured are:
- Payback period, or how quickly the technology can pay for itself
- Net present value, or how much the technology is worth in today’s money
- Internal rate of return, or the ultimate financial benefits of the technology.
All major IT expenditures should be subject to these metrics before, during, and after their implementation. Unfortunately, doing so beforehand requires a degree of guesswork, and doing so afterward can mean it’s too late to redeem an illadvised purchase—which can mean disaster.
There are a number of avenues for determining IT ROI, including internal tracking systems, software and hardware vendors, outside consultants who specialize in ROI initiatives, and automated software programs that claim the ability to project ROI figures based on a few user-provided figures. None of these is perfect for every IT initiative, however, and no one rule of thumb can cover every company, every purchase, or every circumstance.
However, experts in the field agree that there are some IT ROI pointers that can apply across the board. Here are 10 ways to make sure you know what you’re getting into when you sign off on an IT expenditure—and to make sure you get what you pay for.
Mistakes to Avoid
Sometimes what to do during IT ROI efforts isn’t as crucial as what not to do. Tom Pisello, CEO of Orlando, Fla., IT ROI consultancy Alinean, outlines some definite don’ts:
- Not having a plan: Most budgets are set based on what was spent last year plus a growth factor. The better approach: a top-down approach that factors in the competitive environment, combined with a solid bottom-up approach for new project investment needs and rewards.
- Underestimating costs: Not enough diligence is devoted to understanding the true investment in implementing a project.Training, business process changes, application customization,and database migration costs are a few that are often underestimated.
- Scheduling overaggressively: Too many projects are established with unrealistic schedules. Longer schedules mean that the value to the business is delayed, and cost overruns are created.
- Overestimating value: Too often the value estimates for projects are overstated. Typically, results are not risk-adjusted enough to account for the time it takes to adopt the solution and implement business process changes. Counting on conservative realization of benefits can lead to better estimates and less disappointment.
- Failing to prove value: Executives underestimate the value of IT and treat it as a cost center because IT is typically not adept at measuring and proving its value to the organization. Providing key value contribution reports quarterly can help executives understand IT’s contributions.
—D.H.
1. State your case—and keep doing so
Implementing a tracking system will go a long way toward developing a business argument for each project before it is approved. It will also make ROI efforts go smoother, since the data needed will only need to be added to and adapted instead of accumulated all at once.
“This will help the team understand all the benefits, investment, schedule, and risk, as well as how each project ties to corporate goals,” says Tom Pisello, CEO of Alinean, an IT ROI consultancy based in Orlando, Fla. “Projects can be selected up front to deliver higher returns and lower risks. Next, the team can measure how well the projects were implemented and how they delivered on their value promise during and after deployment.”
2. Quantify your IT buying decisions whenever possible
It’s not always easy, but at least make an educated guess about how your new technology will translate to your bottom line.
“If I’m buying a piece of equipment, I’ll ask myself, ‘How much more revenue can I make per day if I use this equipment?’ Or: ‘Can I make a product I couldn’t make before?’” says Craig Berdie, an MTI business services consultant specializing in business strategy and technical requirements. “If you think of it in terms of doing something you couldn’t do before, or more of what you were doing, or doing what you were doing better, you can quantify it.”
3. Keep in mind how your IT purchases will affect your customers
Business owners too often have blinders on when it comes to thinking about the impact that will take place when new technology is implemented. Taking into account how it might enhance burgeoning or ongoing relationships with clients can provide an exciting dimension to ROI metrics.
“A common mistake is limiting the way IT ROI is measured,” says Jan Hepola, an MTI business services consultant. “We tend to focus on our internal systems as they impact us, rather than focusing on how the systems impact our customers. If we think in terms of the benefits to our customers, we’re likely to measure very different things. Ask yourself, ‘What do our customers want that they don’t have today in terms of how they do business with us?’”
Mary Henschel, Henschel Consulting
4. Get the IT people and the corner office folks on the same page
There are lots of ways for IT to create value for an organization. But what looks like value to one division of the company might look like a liability to another, and ignorance of IT needs at the executive level can hamper upgrade efforts and potential company growth.
“Many CIOs and IT directors measure the success of IT projects on whether or not the project finished on time or within budget,” says Mary Henschel of Henschel Consulting in Minneapolis. “CFOs, on the other hand, want to measure technology on a financial metric. A large percentage of IT leaders feel management does not value IT investment.”
Henschel says that to avoid such a scenario, IT leaders should learn senior management’s top objectives for the coming year: Is it to grow revenue and market share? Expand into new markets? Control costs?
“They should align themselves to implement systems that will achieve those goals,” she says. “IT leaders should know the business and the industry and should be building relationships with their business unit leaders and the CFO.”
5. Don’t ignore ROI benefits that might not show up on the bottom line
ROI makes itself evident in lots of ways that might not seem evident at first glance, but can be crucial in retrospect. Card-Source, an Eagan, Minn.-based maker of printed plastic cards, used MTI’s consultation services to choose an ERP system. While CardSource CEO Tom Murphy says the return on a fluid, everevolving product like an ERP system is hard to measure, “we wouldn’t be able to grow to the size we are now without it.
Murphy also points to a private, business- to-business Web site that Card- Source had constructed for dealing with one of its top clients, an insurance administration company. “The return on investment there has been continuing business from these folks—to the tune of $400,000 in revenue annually,” Murphy says. “It’s a customized product, so just the fact that we’ve had this Web site in place has solidi- fied a very important relationship with this customer.”
6. Set goals for your technology purchases, but make sure they’re realistic
There are no panaceas in IT. You should adjust your expectations of new products according to a subjective evaluation of what can be expected from them. A new mail server might speed up internal communications, but it won’t make anyone rich.
“With IT, you’re really buying a solution to a problem, or a way to address an opportunity,” says Kent Myhrman, an MTI business services consultant. “If you’ve purchased the technology, you should know what the goals of the technology are. Over and over, I hear people talk about systems and how they were disappointing. That tells me they had a goal and the technology didn’t meet that goal, possibly because it wasn’t meant to.”
7. Don’t let the business tail wag the IT dog—or vice-versa
New technology is meant to be a means to a more productive organization. But the need for new technology might have less to do with outdated IT systems than with a flawed business model. Your IT goals and business goals should be in sync.
“When company [leaders] think they have outgrown their current systems, they should spend time mapping out their business processes,” says Hepola. “Identify the processes or functions that a new system needs to support rather than letting the potential new systems dictate what the business processes are going to be.”
8. Acknowledge “soft” ROI, but don’t put too much stock in it
One of the biggest benefits of a new tech initiative is increased productivity, but it’s also one of the hardest to quantify. What makes it trickier is that such metrics can be unreliable.
“It can be difficult to put a dollar figure to increased user productivity and prove that a person is more really more productive— unless of course you are eliminating positions as a direct result of a new technology implementation,” says Henschel.
“You can quantify the costs, but the benefits are ambiguous,” agrees Berdie. “A piece of technology might save you 10 seconds per transaction, but who’s to say that the 10 seconds you’ve saved are being used productively?”
9. Optimize your optimization efforts
Streamlining measures such as standardization and consolidation are easier said than done, but they can be done if your organization’s watchword is optimization: getting the most out of your equipment. A recent IDC study showed that infrastructure optimization can reallocate IT labor from more than $1,000 per PC to less than $300 per PC.
“The key for successful IT is to move the spending from maintenance and support over to innovation and investments,” says Pisello. “This requires that the team focus on the current total cost of ownership—how much is being spent to maintain and support the server, network, storage, applications, and PC infrastructure. Optimizing the management of this infrastructure can help reduce ongoing costs and drive cost savings.”
10. Ask for help
There are numerous IT investment portfolio management tools available to help companies track and measure value. Some are part of larger suites to streamline project management and development, and take some effort to implement.
“The value they deliver is usually immediate for larger portfolios where duplicate projects can be eliminated and risk can be reduced,” says Pisello. “For smaller companies, a spreadsheet implementation for portfolio management can work just as well, although they don’t have structure and metrics preloaded.”
ROI tips are numerous and wide-ranging, and these 10 are only the tip of the iceberg. Some research will no doubt uncover others that are more specifically relevant to your business. But one thing you can’t afford to do is to skimp on the process—or skip it entirely.
“It’s like buying insurance,” Berdie says of IT ROI. “You hate to do it, but risk analyses don’t lie.”
Photograph of Craig Berdie taken by Dan Marshall. Photograph of Mary Henschel taken by Mark Luinenburg. Photograph of Jan Hepola taken by Sara Jorde.
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