Monday, October 24, 2005

Elusive Return on Investment

An article in CIO magazine revealed a fascinating paradox. 63% of IT executives claimed that they are required to present a cost justification for IT projects (a survey by Cutter) yet according to Aberdeen Group, just 5% of companies actually collect ROI data after the event to see whether the benefits actually appeared. I have to say that my own experience in large companies bears out this "ROI gap". Most post implementation reviews occur when a project has gone hideously wrong and a scapegoat is required. There are exceptions - I have been impressed at the way that BP rigorously evaluate their projects, and Shell Australia used to have a world-class project office in which IT productivity was rigorously measured for several years (a sad footnote is that this group was eventually shut down to reduce costs). However, overall I think these apparently contradictory survey findings are right: a lot of IT projects have to produce a cost/benefit case, but hardly ever are these benefits tested.

It is not clear that the failure to do so is an IT problem, but rather a failure of business process. Surely the corporate finance department should be worried about this lack of accountability - it is hardly IT's problem if the business doesn't bother to check whether projects deliver value. It really should not be that hard. Project costs (hardware, software, consultants, personnel costs)are usually fairly apparent or can be estimated (unless it would seem, you work in government) while benefits are more slippery. This is mainly because they vary by project and so don't fit into a neat template. However they will usually fall into the broad categories of improved productivity (e.g. staff savings), improved profitability e.g. reduced inventory, or (indirect and woollier) improved customer value e.g. the falling price of PCs over the years. It should be possible to nail down estimates of these by talking to the business people who will ultimately own the project. Once these benefits have been estimated then it is a simple matter to churn out an IRR and NPV calculation - these are taught in every basic finance class, and Excel conveniently provides formulae to make it easy. Of course there are some IT projects that don't require a cost-benefit case: regulatory being one example ("do this or go to jail") but the vast majority should be possible to justify.

By going through a rigorous analysis of this type, and then checking afterwards to see what really happened, IT departments will build credibility with the business, something that most CIOs could do with more of.

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