Hard facts on ROI for IT projects required

The usual metrics aren't enough, argues Paul M Ingevaldson

When the CEO asks the CIO, "What is the value of IT?" the answer is usually something like, "We keep the company running", "We automate most of the functions of the company", "We contribute to the company's efficiency", or "We improve sales". Then the CIO comments about the various systems that do all of those things.

Wouldn't it be great if the CIO could answer that question like this: "Over the past five years, the major systems developed by IT have delivered a total return on investment of 39% while increasing our costs by only 5%." Now, that's what a CEO wants to hear, not some self-aggrandising spin that can't be quantified.

There are at least three reasons why this is not routinely done in companies today. Here they are:

First of all, an ROI study must be done at least a year after a system has been implemented. This is necessary in order to have enough time to identify the true savings and costs. The people who worked on the project would be well suited to doing such a study, but both the user department and IT would have a hard time tracking them down in order to put them to work on that task. They will have moved on to more time-critical work, or they may have left the company.

Second, the work on the ROI study must be done within the user department, since that is where the savings are realised. But the user department is probably not interested in committing more resources to the project just to help IT prove its value to the company.

Finally, the savings may include headcount reductions. If the user department has either redeployed or terminated the people who worked on the project, an ROI study could cause embarrassment or, at minimum, require some explanation.

My solution would be to name a person or persons — paid for by IT but working for the CFO — to analyse all major systems one year after they are deployed. This person's or group's work would begin in the early stages of system design so they would know the basic specifications of the new system. The analysis would measure IT development costs, ongoing IT production costs, ongoing user staffing and production costs, and ongoing user savings. The product of that study would be a computation of the actual ROI achieved by each project and a determination of each project's effectiveness in the user department.

Such a study would provide many benefits. It would verify the actual ROI of the project and compare it to the preproject estimates. That would help rein in those outrageous ROI claims that are sometimes used to gain project approval. The study would also compare the deliverables promised against those that are actually delivered. Most important, it would build a database of numbers showing the true value of the measured projects. That would make it easier for IT and the user departments to quantify the benefits of projects and thereby show the value of IT to the corporation.

It's often said that IT needs to act more like a business. There is no better way to act like a business than to know and demonstrate how effectively IT helps the company to achieve its financial and business objectives.

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