After a couple of years of dotcom madness, return on investment is once more back on the agenda. Squeezed by the recession, financial directors are going through their budgets with a fine-toothed comb.
ROI has always been a sore point in the IT industry. In 1995, in his book The Trouble With Computers, Thomas Landauer challenged the idea that increasing computerisation necessarily means increased productivity. He quoted a series of studies to prove his point, including a survey of major US banks that showed little or no correlation between IT investment and shareholder returns.
Even now, six years on, surprisingly few organisations bother to quantify their IT ROI. But figuring out what you're getting for your IT bucks is comparatively easy with customer-facing e-business systems. Measures like increased sales, decreased cost of sales and improved customer retention provide a tangible way of evaluating performance before and after system implementation. Putting figures on the benefits from internal systems can, however, be a tougher proposition.
Savings on internal systems
For some internal systems, there are obvious savings that can be made and measured. Centralising information resources using an intranet can lead to tangible savings in information bought in from external sources, for example. Many companies are moving towards self-service online human resources systems where the cost of developing the system can be justified in terms of reduced need for HR staff.
Training is another area where it is often easy to measure at least some of the returns from automation. For example, Shell recently implemented an internal e-learning programme delivering training over its corporate intranet. Its first course, which cost around $30,000 (£21,000) to build, replicates a course that the company ran in the Netherlands, and cost the firm around $100,000 per year on travel, food and accommodation. Delivery costs are now virtually nil.
But Paul Wood, learning technology team leader in the Shell Learning Centre, points out that true ROI is still hard to assess. "Most ROI currently made public is based around processing and efficiency, but as our workforce is fundamentally different to this, the ROI is even more difficult to measure," he says.
"We are training post-graduate engineers who make decisions that can cost hundreds if not billions of dollars, so the potential cost savings and future income benefits can be enormous. We are pursuing research into new and improved ways of measuring ROI, but it's hard to be specific when a decision made years ago may only be coming to fruition now - long time frames are normal in this business. So our bottom-line ROI measure is how effectively we support the competence needs of the workforce - and those numbers can be measured."
For internal ROI, there are a number of fairly well established processes that can be used. For example, methods such as activity-based costing, which measures the cost of each step in a business process, including labour and material costs, could be used to compare expenditure before and after introducing a new system.
Benchmarking against your rivals
Processes like these only let you compare your company against itself. If you want to judge how your internal IT investment matches up to industry norms you need to use benchmarks. Benchmarking services let you compare your company on IT spend and key performance measures with others both in your specific market sector and across other industries.
They work by large numbers of companies submitting data on agreed indicators to the service anonymously, in return for being able to benefit from benchmarking information themselves. It's a fine example of enlightened self-interest, since the more companies participate in the service, the more valid the results.
Organisations such as Compass, Hackett Group, Giga and the Centre for Interfirm Comparison collect data from a cross-section of organisations and can give you a picture of whether your spending is in line with that of your competitors.
The recently launched Technology Infrastructure Forum has a blue-chip benchmarking service that measures more than 1,000 separate metrics. These are mapped against each other to provide a yardstick that subscribers use for comparison against other organisations in six areas: IT costs, IT staff numbers, the desktop environment, application development, infrastructure costs by platform and voice and data networks. The Benchmarking Centre acts as a focus for information on benchmarking within Europe.
Software vendors wake up
Software vendors are also becoming more conscious of the need to prove ROI, and many of them now offer some form of benchmarking service to their customers.
Both SAP and JD Edwards, for example, have recently added value calculators to their Web sites to enable customers to compare their supply chain performance against industry competitors and make improvements. ERP vendor i2 uses an independent research firm to carry out audits of its customers and measure the ROI it is delivering.
Infrastructure management software specialist Peregrine Systems has developed a methodology to help its customers calculate ROI. Simon Scarrott, director of marketing and business development and former head of consulting at Compass, recommends following the five steps listed in the box on the right. They will provide a sound route to success.
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