Getting an ROI on ROI

I had no idea that there were so many ways of measuring return on investment, or ROI. I now know there are at least half a dozen.

I had no idea that there were so many ways of measuring return on investment, or ROI. I now know there are at least half a dozen.

I also know that the whole notion of formally calculated ROI is far from universally accepted as useful.

After digesting US material on the topic, and duly persuaded of the importance of the subject, I asked a CIO and a consultant which method of ROI calculation they each favoured. In my fervent state, I was a bit surprised when they were somewhat dismissive of ROI as a formal process.

The CIO, who works for a company which contributes about 0.5% of the country’s GDP, said ROI was all very well, but he tended to make IT investments as and when they were needed, not on any kind of discretionary basis. Therefore there was no need to present complicated financial justifications for projects.

The consultant, whose breed probably thought up ROI in the first place, didn’t get at all excited when I asked him about it. His response suggested ROI metrics exist solely for prising money from those holding the purse strings. Once the spending was approved, he seemed to imply the fancy arithmetic could be quietly forgotten about.

Those certainly weren’t the answers I was expecting to hear. Perhaps they point to a difference between the level of discipline within IT departments here and in the US. That could be a symptom of US organisations’ greater scrutiny of IT spending as their economy wallows. Or it could be that the two people I spoke to aren’t representative of the wider New Zealand IT community, which I’m fully prepared to believe.

While not an adherent of the ROI creed, the CIO I chatted to said his IT organisation is having a better time of it than its counterpart at head office across the Tasman. Over there, IT was outsourced and now they’re learning all about the subtle pressures that come into play as a large services organisation exercises the fine print of its contract. That means upgrades, for example, being pushed on to the customer to suit the service provider’s revenue goals, rather than to meet customer needs. Would an ROI calculation have discovered potential fish hooks like that?

Computerworld certainly isn’t advocating dismissal of the discipline, otherwise you might rightly ask why we’re devoting so many column centimetres to the subject. We’re sure it serves a useful purpose in establishing IT investment priorities, and in aligning IT goals with organisational ones. But not for everyone.

For those undertaking an ROI calculation for the first time, here are some tips to help loosen the purse strings. Do: create a document that explains what you’re pitching and why and the various options; use ROI in a context which shows IT projects relative to one another; justify IT spending in terms of how it will make the organisation more successful. Don’t: apply ROI to every project; forget to figure out the level of risk associated with a project; let your ROI processes go stale – they need to keep up with changing conditions.

Doesburg is Computerworld’s editor. Send letters for publication to Computerworld Letters.

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