Don't start investing in e-business technology unless you can
measure the benefits, if any. Delivering an obvious return on
investment can help protect IT budgets from the chop
The economic downturn has altered business priorities for everyone
involved in IT. There is growing awareness that IT can directly
affect a company's customer relationships, its ability to control
costs in key areas, its exposure to legal action and the success of
key corporate strategic goals. Consequently, the pressure is on to
prove rapid return on investment (ROI) from all IT ventures.
In recent years, ROI has come to represent more than just
recovering the financial cost of an IT system or project -
so-called payback - or increased profitability. Instead, ROI is now
measured across a number of different areas, including finance,
time, process and staff savings, improved customer service, a more
responsive supply chain, competitive positioning and employee
satisfaction.
"Spending money on IT guarantees absolutely nothing," says Paul
Strassman, an associate of consultancy at the Butler Group, whose
recent research reveals only a random correlation between IT
spending per employee and return on shareholder equity (ROE). "The
absence of a demonstrable relationship between profitability and IT
spending should be seen as evidence that other influences, such as
strategic advantages, competitive positioning and leadership's
effects, are likely to be more decisive than information
technologies.
"Technology has been over-valued by companies trying to match and
outdo each other's IT capabilities, but this all occurred without
any direct relation to profits," says Strassman.
The research findings expose the IT suppliers who persist in
overselling the benefits of their products. In future, IT users may
force IT suppliers into contractual obligations that invoke
litigation when promises fail to deliver tangible results, predicts
the Butler Group. This will be triggered by a growing board-level
scrutiny of IT budgets and a requirement to demonstrate ROI.
An added problem for users is that there is little historical data
available on most IT projects to measure ROI effectively. In
addition, new systems invariably have a unique domino effect on the
existing IT infrastructure.
The UK's largest private medical insurer, Bupa, concedes that
despite spending £6 million on an essential customer relationship
management (CRM) project it cannot measure ROI from the completed
system because it necessitated IT infrastructure changes.
In specific online projects, companies have moved on from just
measuring ROI in terms of increased revenue and profit. Initially,
dotcoms counted the number of 'eyeballs' driven to a virtual
storefront, but time has shown that the quality of website hits and
a site's ability to retain customers - what is known as stickiness
- is a better measure of ROI and business value than measuring site
traffic.
Today, e-business users also measure ROI by quality of service and
how technology will impact the core business. A further valuable
measure is staff morale. "Employee satisfaction is exceedingly
important to companies trying to retain a skilled workforce," says
Barry Padgett, business development manager of EMEA for expense
management specialist Concur Technologies. "The project under
consideration must contain employee satisfaction and ROI, in
addition to all the old financial criteria."
Tailor-made solutions
Metrics for measuring ROI from IT
projects differ from those employed in general business in that IT
suppliers are increasingly offering ROI models tuned to their own
solutions as part of their sales strategies. Some suppliers will
even provide customers with a tool for continually assessing,
tracking and realising the full benefits of their solution as it
rolls out in a phased implementation.
This pre- and post-sales ROI support helps IT managers present a
business case to the board to get sign-off for IT purchases. It
also aids in building an ROI database of IT projects, thus enabling
more comprehensive evaluation for future projects.
However, some suppliers are flogging weak ROI sales stories and it
is easy to fall foul of them. Consequently, it is advisable to have
a fundamental knowledge of your business before any e-enablement.
By going through the arduous task of understanding where things
stand prior to the project, measuring after enablement should be
much easier as the process should have improved.
The Technical Infrastructure Forum (TIF), an independent forum that
represents Europe's largest buyers of information and communication
technology, has launched new benchmarking services which enable
organisations to measure the contribution to profitability and
efficiency made by their IT investment.
The service can also outline the business benefits to be gained by
comparing one company's IT costs, infrastructure and internal user
satisfaction with those of its peers. BAA, BP, Friends Provident,
Powergen and the Office for National Statistics have already used
the service and believe it has made a real difference to their
bottom lines.
The TIF service is designed to be easy to carry out, cheap and
solutions-led, as opposed to the benchmarking services of other
providers, which the TIF claims identify problems and then charge
extra consultancy fees to provide the solution.
Clearly, as companies move to reduce operating expenses in an
economic climate which rewards profitability and severely punishes
missed earnings, a solid ROI story is vital when purchasing new IT
systems and beginning new IT projects. With companies scouring
their books looking to cut costs wherever they can, IT departments
are squarely in the firing line. Now is the time to deliver.
Case study: Telewest
Broadband media and telecoms
operator Telewest Communications is contractually obliged to
provide its 200 digital TV content partners with analysis and
reporting information on customers channelled to the partners'
e-commerce sites. However, until recently, the company had no
formal mechanism for doing so.
After consulting US research company the Gartner Group, Telewest
solved its problem by deploying NetGenesis' E-Metrics Solutions - a
combination of software and analytic consulting services that can
quantify the ROI from complex web initiatives.
An added bonus is that the software can also be used to capture
customer data for Telewest's sales team so they can target
prospects more accurately in future.
To date, Telewest has spent £1.3 million on its reporting project,
with e-metrics costing £630,000. It predicts a six-month ROI
through projected contract renewals and new business resulting from
better targeted sales and marketing campaigns.
Nick Slowe, head of management information at Telewest, concludes:
"Our investment in NetGenesis helps build our business
relationships, which is critical to future growth."
Case study: Egpropertylink
Egpropertylink, a UK online
commercial property listing service, recently upgraded its basic
rules-based search system to future-proof its service.
The company had considered three strategies:
stick with the old
search system;
replace it with an in-houseorcontracted rules-based search (SQL) system; or
upgrade
the technology to a more sophisticated system.
The main quantitative ROI metric applied to these choices was to
see a decrease in the number of calls from customers to the
helpdesk that inevitably followed unsatisfactory searches using the
old system.
Egpropertylink decided that the merits of the first two
alternatives measured against the ultimate aims of the project,
together with the prohibitive cost of the SQL system, made both
unsuitable. Instead, it chose to upgrade its system to NCorp's Ijen
intuitive pattern-matching technology, a system that mimics how
humans handle complex data.
This story is testimony to the grey science of ROI measurement.
Although the number of calls for help from customers have
decreased, the growing popularity of the site has meant that the
total number of calls received has actually increased.
Nevertheless, overall customer satisfaction with the service has
improved since the search engine is now so much more
responsive.
ROI from typical e-business projects
1. Customer relationship management (CRM)
Consultancy
firm Accenture claims that a $1bn (£69m) company can make as much
as $130m (£89m) more in pretax profit if it manages its CRM
performance well - that's a 30% performance increase over a
predetermined time period.
Accenture's new ROI metric for CRM consists of a weighted series of
measurable benchmarks and performance indicators. The metric takes
into account the measurement of customer satisfaction, for example,
measured by the retention of customers over time, the mix of
revenue, reduction in time spent with customer complaints, and the
ability of the customer to manage his or her own destiny. It also
takes into account the classic measurements of cost reductions,
revenue increases and market share indicators.
2. E-procurement
A free toolset to estimate potential
ROI from e-procurement is available from the websites of sponsors,
including Oracle, the University of West England, the Chartered
Institute of Purchasing and Supply, and KPMG Consulting.
I-SAVE - independent savings analysis verification and evaluation
of business procurement processes - is a new set of self-diagnostic
tools based on research conducted among 700 purchasing managers
buying 80 types of commodity. The overall percentage saving
(assuming the same level of spend per commodity) was found to be
7.8%.
In addition, it was found that, on average, the private and public
sector registered a similar level of savings, 7.3% and 7.2%,
respectively. The average savings across all relevant commodities
for the manufacturing sector were slightly lower at 5.44%.
Irish global transaction company, Marrakech, has launched a website
where users can calculate ROI from e-procurement solutions at
www.milliondollarpencil.com.
3. Multilingual content management
Websites are
increasingly being produced in different languages, but a metric
for ROI has been sadly lacking to date. However, there are measures
that can be adopted to achieve quantifiable ROI.
Preparing content usually requires many manual sign-offs from
multiple parties. Companies could save an estimated $75,000
(£51,500) or more per initiative, each year, by automating this
manual process with tools that can route text for translation. This
does not include the financial benefits of speeding up the process.
Translation workflow automation has shortened some companies'
product release cycles by as much as three months. To further
maximise ROI, translation applications should integrate at source
level with existing single-language content repositories. Use of
such 'translation memory' could save $10,000-$20,000
(£6,000-£12,000) or more for every $100,000 (£60,000) spent on
translation.
4. Outsourcing
Calculating the number of pounds saved
on an outsourcing investment is not enough to understand whether a
company is getting value for money from a contract. Managers should
also employ metrics such as revenue generation, speed, quality and
skills transfer to evaluate the benefits of outsourcing.
Analyst company Forrester Research quotes advice from the following
anonymous US users. From the manufacturing sector: "We sit down
with the business units, the IT team and the vendor to set clear
metrics. Every other week, we meet to make sure the project is on
track."
From a utility company: "We withhold 25% of payment for 90 days
until the outsourced system is tested without defect. If it is not
done properly, we withhold payment. For late delivery, we hold back
as much as 25% of the agreed price. These techniques keep the
vendor in sync with us on the project."