Return on investment IT directors out to woo a reluctant board to invest in IT need to sharpen up return on investment calculations to make their business case more persuasive.
Return on investment has become an important preoccupation for IT directors since the dotcom bubble burst and IT budgets were cut. But the term ROI has become so widely overused and misunderstood that it is in danger of becoming meaningless.
A study carried out by the Cranfield School of Management, which surveyed more than 700 IT and business directors, looked at how IT investments are appraised. The results showed a limited understanding of how ROI applies to IT investment and how it should be calculated.
The quality of IT investment appraisal is “poor” or “very poor”, according to 37% of the IT and business directors surveyed. A further 47% believed the assessment of business benefits to be “poor” or even worse. Alarmingly, 85% of the respondents believed that IT investments are influenced by personal or political aspirations, rather than straightforward achievement of business goals.
Rob Lambert, senior lecturer at Cranfield and co-author of the report, said it had commissioned the survey in response to concerns from IT directors about how to sell projects to the board.
“We were getting feedback from IT directors that organisations were reluctant to invest in IT and proposals were not going forward,” he said. The completion of the survey revealed a worrying state of affairs. “At a fundamental level, senior management does not believe the costs or benefits presented. IT is not even at first base, let alone getting to the point of arguing business risk mitigation,” said Lambert.
The most common problem revealed by the Cranfield research was the failure by the IT department to provide a basis for their calculations. “Often the benefits would show good numbers, but there would be no audit trail backing it up,” said Lambert. Costs need to be broken down and it is important to account clearly for hardware and software costs as well as internal and running costs, he said.
Hamish Macarthur, founder and CEO of Macarthur, Stroud, International consultancy believes the problems start even further back than the process of documenting evidence and building a substantive justification. "ROI is about justifying an investment for something that makes sense to the business" he explains. For this reason IT investments should be justified in the same way as any other business investment.
IT directors can also use spreadsheet-based software packages, known as financial decision-making, to help draw up proposals for IT investment. The software has templates for different kinds of IT projects, with a series of key questions to help clarify the likely ROI.
Some areas in IT can offer a quicker payback (see box) but much still hinges in the way ROI is calculated.
Suppliers such as Intel often attempt to take the guesswork out of predicting ROI by running a pilot of proposed installations. Paul Tartellini, practice leader for Intel Solution Services, said, “There is no better way for IT directors to strengthen their business case than by having hard evidence available. It is very difficult to stand up an opinion.”
But even where hard evidence is available to demonstrate the potential for ROI, IT decision-makers still have to be politically astute to get support and funding for their project.
The Royal Cornwall NHS Trust achieved a successful ROI “quick hit” due to the persistence of IT security manager for the trust, Paul Jacka, and his team.
The trust has 6,000 end-users and Jacka was concerned that too much bandwidth was being consumed by non-business-related internet browsing and virus attacks. One potentially harmful effect of this browsing was to leave less computing resources on the network to support critical patient care systems.
After monitoring the trust’s network, Jacka discovered that between 5% to 8% of users were using the internet for browsing non-medical websites. But when he presented this evidence to the board to justify the purchase of anti-surfing software, they did not believe the figures, said Jacka.
Jacka revised the figure down to 2%. Even this reduced estimate would bring the trust savings of £288,000 a year, and the board approved the installation of software to help control the way staff use the internet at work.
Since the measures were introduced last year, bandwidth usage has decreased by 40% to 50% and Jacka believes that savings to the trust are double those originally presented to the board.
But despite the success of Cornwall NHS trust in being able to point to a substantial return on its IT investment, many IT directors still struggle to demonstrate ROI, according to experts and recent research.
Consolidating IT systems, or moving them offshore to lower-cost countries such as India, are among the areas that may provide a quick return. But IT directors will still have to justify the expenditure through clearer calculations and documented evidence to convince a sceptical board.
Five quick ways to improve ROI
Whether it is a question of consolidating disparate datacentres, a bunch of small systems within one site, or just printers, there are savings to be made by using a smaller set of systems across a business.
As information is the the lifeblood of all businesses, the requirement for storage is growing at a rapid rate – 76% compound growth per annum, according to the Storage Networking Industry Association.
There is quick ROI to be earned by managing and planning storage better.
Storing data online requires expensive discs, and using a storage system that is directly attached to other IT systems is often costly to manage.
Using a storage area network, where storage devices can be shared by different systems, is more efficient and enables storage management policies to be automated.
Gartner Group maintains that giving staff access to mobile devices and wireless Lans can save hours of time per member of staff, per week.
Blocking non-business-critical websites, pop-ups and e-mail addresses can reduce bandwidth usage drastically.
It also helps focus staff on work-related tasks, which should improve productivity.
Putting callcentres or software development offshore to countries such as India or the Philippines
can yield potentially huge savings.
Greatly reduced labour costs – one tenth is the rule of thumb – supported by the availability of cheap, reliable global networks means that savings of up to 40% are possible, according to some analysts.