ROI & Business Case

 
 

 

Solutions Matrix Knowledge Base is an outrageously rich collection of articles and case studies on developing the business case.


 
 

An Enhanced Framework for the Management of Information Technology Projects Creating and Using a Business Case for Information Technology Projects

An excellent step-by-step guide from the Treasury Board of Canada

The Executive Conversation trains sales pros to make a business case.

 

ROI of Human Capital by Jac Fitz-Enz

 

Maximizing IT Investments

Five steps to capturing IT value-and how to measure the results.

July 15, 1999 Issue of CIO Enterprise Magazine

It's important to define value in both performance measures and dollars, since all stakeholders will be able to understand the impact of the new technology in terms they deal with most often. Order specialists who know that they should be able to handle 30 percent more calls each day are more likely to hit that target than if they're told the new software will help them save the company $1,000 a month. And ultimately, the people who use the technology determine its effectiveness. Value can be expressed in many ways, but it cannot be expressed at all unless it is captured. With clearly defined qualitative and quantitative goals and the dedicated resources to measure whether they've been met, companies will be well positioned to reap the benefits of IT


"Define value in terms of business performance measures, you will be able to state ROI in terms most relevant to each group of stakeholders."
 

Rethinking ROI, Information Week, May 24,1999

Evaluating the potential return on an IT investment can be fairly straightforward--at least in theory. If a CIO shows that a new system will cut costs and pay for itself after a couple of years, or that it will significantly improve efficiency at a reasonable price, business executives usually give the green light. This is especially true of tactical projects, such as applications that cut order-processing costs. But in other cases, IT initiatives have become so important that companies are either not evaluating ROI or they're looking to develop new ways to measure ROI to take into account a project's strategic value. In this issue, InformationWeek examines how companies are addressing ROI in four areas: e-Business, ERP, intranets, and data warehousing.

Regardless of the type of IT project, it's clear that as technology becomes more central to a company's ability to compete, IT and business executives are being forced to rethink their traditional approach to ROI.

e-Business. As companies launch electronic-business projects, many are tossing out conventional thinking about the need for a return on investment and focusing on how the initiatives advance their overall business strategy--whether it's to improve customer satisfaction, increase brand awareness, or open new sales channels. A small but growing number of companies have recently begun searching for new ways to measure the ROI of their E-business projects. For less strategic projects, such as those that increase the efficiency of the supply chain, traditional ROI evaluations are still being used. But the bottom line is that E-business is seen increasingly as something that must be pursued at all costs.

Critical Decisions Ironically, companies that weigh those factors carefully often come to the same conclusion: They must proceed--regardless of ROI. That's because the Internet has increased the speed of business, changed the nature of customer service, and given companies the ability to enter new markets, says Diana Brown, VP and general manager of financial services for Web integrator Scient Corp. Companies must respond. "You have to keep E-business out of the normal budgeting process," she says. "If these investments are held up to the same magnifying glass as other line items--to make money this year--it's very hard to make anything happen."

More companies are justifying their E-business ventures not in terms of ROI but in terms of strategic goals. In the InformationWeek Research survey, creating or maintaining a competitive edge was cited most often as the reason for deploying an E-business application. That was followed closely by improving customer satisfaction, keeping pace with competitors, and establishing or expanding brand awareness (see chart).

metrics for E-business developed by Scient. These ask: Does the initiative target a valuable customer segment? Does it improve the quality of customer service? Does it reuse existing IT infrastructure? Does it give the bank a commanding market-share lead from being first to market? Does it help the bank learn more about its customers? Is it a strategic fit with other existing ventures? "We mainly use the new metrics to compare each of these initiatives with each other," says McKerlie. If the company has only $100 million to spend but wants to go ahead with projects that would cost $200 million, it uses both traditional and new metrics to identify the most important projects to pursue, he says.


 
 

Peter Keen

CHANGING THE RULES OF THE GAME Policy sets the organizational rules of the game. It defines authority, procedures, and planning assumptions-the constraints within which the business case must be made. It establishes territorial and political boundaries and, above all, delimits spheres of discretion. The more innovative the move, the less likely it is to fit existing policy.

For radical moves, the aim is to raise consciousness and establish a business focus; the workshop and reports should be filled with examples from industry and analysis of trends in the industry; the technology is related to these, not the reverse. Innovative business moves need a sharper focus and a framework for planning; the business relevance of major options and trends in the technology has to be highlighted; the goal here is to help businesspeople feel they understand the key planning issues. Incremental moves are focused on the proposal, not the broader marketplace and technology; one needs to highlight the relevant choices and tradeoffs. For operational moves the vocabulary and concepts needed to assess the proposal must be clearly defined; the focus is on briefing not education, on specifics, not concepts.

The uncertainties intrinsic in innovation make it essential not to get locked into presenting, and then having to defend, a single proposal. Equally, one must face up to and even highlight risk rather than downplay it. The more innovative the business application, the fewer the precedents against which to compare it. The greater the likely payoff, the greater the likely risk. The decision to make an innovative or radical move is a business decision about return and risk. The real issue is how far along the spectrum of risk and return management is willing to go, not whether to say yes to one specific combination of the two.

There is generally, for any one business opportunity, a wide range of technical options and levels of commitment. Obviously, it makes no sense to look at all the combinations. A much more effective approach is to narrow the analysis to three or four key alternatives: Do nothing, a real option, has to be evaluated systematically. The "ideal" alternative assumes the best of all worlds-things will work out as planned, market assumptions will be correct, the technology will work, etc. A few options between these extremes. One of them will almost certainly be the one recommended by the communications manager and should be flagged as such. Based on these options the implications of changes in key factors can be analyzed from the start.

FINANCIAL ANALYSIS It is only after the issue of value has been established that cost can be brought in, and even for operational moves value and cost should be kept separate. This flies in the face of traditional approaches to cost-benefit analysis but is surely the only sensible way to handle innovative business proposals that rest on technology. Bundling costs and benefits together, trying to express uncertain qualitative benefits directly in terms of cost displacement or avoiding the problem entirely, simply muddles the issue. This in no way means one need not be rigorous about cost. The overall issue is handling uncertainty and establishing business value. This means be rigorous about value, be rigorous about risk, then be rigorous about cost.

ROI modeling doesn't work for discontinuous change.
     



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