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."
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-house or contracted 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.
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.
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."