How to demonstrate ROI

IT projects will only get the go-ahead if managers can clearly show that they will provide a return on any investment made. This...

IT projects will only get the go-ahead if managers can clearly show that they will provide a return on any investment made. This requires a disciplined approach, but one which in the long term will give IT a central role in business. In the current economic climate, every penny of every IT project must be made to count. A study...

by research group NelsonHall has found that difficulty in demonstrating ROI for new IT projects is the real cause of the IT industry downturn. NelsonHall Managing director John Willmott says: "IT is now part of mainstream business and has to justify its contribution using similar measures to any other business initiative. Unlike during the first months of the year 2000, when organisations reacted to the emergence of dotcoms with panic reactions of their own, new projects will no longer be approved unless they can objectively demonstrate a significant ROI." With IT budgets being squeezed IT managers are feeling the pinch. So what can they do to keep their heads above water? Dr Peter Kawalek, from Manchester Business School, says: "There's no science to it. If you want a larger slice of a declining IT budget you just have to make the right pitch to influence the right people." The right pitch, according to Kawalek, is contingent on many factors including the mindset of business leaders and the severity of the business environment. "It comes down to politics and the best politicians will get the best pieces of the cake," he says. "But this is not to say the situation is hopeless or random. An IT manager will do well to invest time in talking to business leaders to find out how they are facing up to the economy and discover their feelings. "The big question to ask is whether it is imperative to take costs out of the business or if there is a different emphasis, perhaps on increasing flexibility or better utilisation of knowledge." Kawalek believes far-sighted IT managers will already be exploring how their business leaders are responding to these issues. Meanwhile, there are tools at hand such as project portfolio management (PPM), which CIOs at major firms including Brinker International, Merrill Lynch, Schlumberger and Verizon are using to demonstrate IT value. Portfolio management enables IT departments to control investment as a single set of activities in one place. It helps ensure that IT projects are well balanced in terms of size, risk and projected payoff and aligned to business objectives. Each project can be easily risk-assessed and prioritised and, because PPM is familiar to the financial director and founded in business economics, IT departments will gain business credibility by using it. John Handby, chairman of the IT directors forum CIO Connect, says his forum is doing its best to help and has a simple and positive message for beating the IT budget blues. "We are currently running a cost containment initiative within the forum to highlight best practice," says Handby. "As far as proving value is concerned, service costs can always be set against external benchmarks and new projects should always be fully justified in terms of business benefits and ROI." He adds: "There are clear economic challenges. The survey we took of our members in August showed that 43% of our members expected IT spending to stay the same in the period ahead and 32% expected it to increase." These are difficult times but the advice from experts is to stay calm, research the real needs of your company, prioritise IT investment and be positive. Much good could come from the current economic problems with IT being treated as a standard part of the business infrastructure and IT department heads improving their relationship with CEOs as they are forced to appreciate each other's roles more. Consequently when the climate thaws, IT managers may well find themselves in a more central and mission-critical role.

This was last published in October 2001

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