Strategy clinic: Getting the best return on investment

In the past year, return on investment has become the mantra of our business, but how can I justify vital IT projects such as...

The question

In the past year, return on investment has become the mantra of our business, but how can I justify vital IT projects such as enterprise application integration and disaster recovery in terms of ROI?



The solutions

Those who benefit should fund the investment

Anthony Harrison, The NCC Group

The question here is, "Whose investment is it?" Look, for example, at disaster recovery.

An IT manager may understand the need for disaster recovery, but be unable to justify the expenditure in purely IT terms. In this instance you need to look at the bigger picture.

If disaster recovery provision could stop the organisation from losing money then it must have a risk-adjusted business value. This business value should be quantified and used in the return on investment calculations. In this case, the organisation should be responsible for funding the investment.

There are some instances, and enterprise application integration might be one, where there are clear benefits to the IT department through, for example, application, server and storage consolidation. Again, savings should be quantified and used to calculate the return on investment. In this case the IT department could fund this investment from its existing resources.

Finally, when determining project lifecycle budgets, it is a good idea to factor in allowances for disaster recovery and integration on a project-by-project basis. This can help you to avoid facing sudden high investment costs.

Make sure planned projects align with business aims

Chris Potts, Dominic Barrow

The fact that you describe these things as "vital" suggests that you are already convinced they will result in a healthy return. You may be right, but I think you are falling into the trap of seeing return on investment as a way to justify something. That is not what it is for.

You need to know the return on investment of a potential project to find out whether it is genuinely worth doing, then to compare it with other projects that are competing for the same investment. The company needs to channel investment resources - money, people, etc - into those projects that will deliver maximum return on investment.

Provided that you are going to approach this with a more open mind than your question suggests, here are the steps you need to take. You will need to collaborate with business colleagues in other areas to achieve them:

  • Find out what targets the company must achieve to deliver its business strategies and operating plans
  • Determine which target each of your proposed projects will help to achieve. For example, enterprise application integration is likely to contribute to a different target (efficiency) from disaster recovery (survival)
  • Assess each project's incremental value - how much it will contribute to a business target that would not be achieved without it. Document your rationale for this assessment
  • Write down, for each project, what the company will need to do to deliver the value that you have in mind
  • Calculate the total cost to the company of delivering the project's value, both in up-front investment and any impact on future running costs
  • If you are satisfied that the project looks worthwhile, develop an investment proposal in line with your company's governance standards.

IT is only vital if it supports sound business decisions

Christopher Young, The Impact Programme

From the business' perspective, neither enterprise application integration or disaster recovery will be seen as "vital IT programmes". They are just IT investment decisions that will have to compete with other resource allocation decisions.

Your role is to explain why you believe they should (or should not) take priority over these other options. So you need to be clear about the value created by each. One way of looking at the value IT provides is through a simple model. One that we use at The Impact Programme groups IT activities into three layers:

  • Business as usual - running today's business on today's applications. It is almost impossible to calculate a return on investment on this expenditure - it is a cost of doing business. IT's role is to continually try to reduce this cost through managing risk and buying smarter
  • Business change - change projects that enable more business to be written or costs to be reduced consequently, where return on investment can be measured and assessed
  • Strategy development - identifying ways that technology can assist in changing the business fundamentals and models. This can be the most valuable contribution to the business. It, too, cannot be measured in terms of return on investment.

You cannot easily create a robust return on investment case for disaster recovery. It is a cost of doing business. Company directors have an obligation to ensure that the company is a going concern. In most instances, this will include having an effective disaster recovery plan. Failure to meet this requirement can result in the individuals being barred as directors.

Consequently, most directors should be be keen to understand the personal liabilities that would accrue from not having one. Any decision about the level of disaster recovery cover is for the board. It will be based on an assessment of risk, cost and, importantly, the trust the board has in you. Do members believe that you have got the risk, cost and reward balance right? If you do not have their trust, whatever you may have decided is best for the business will be irrelevant. Presenting a spurious return on investment case will reduce trust.

Enterprise application integration programmes result in some business change. They should deliver business benefit and so be able to demonstrate a robust return on investment. If your programmes cannot do this you will rightly struggle to convince the resource allocators to make the necessary investment.

Careful mapping of projects proves level of return

Klaus Elix, AMS

Defining return on investment depends on the specific type of IT project being undertaken. Disaster recovery and enterprise application integration are good examples.

Disaster recovery should not be about how much return on investment the system will achieve, but more about your ability to plan for contingency management and to recover IT systems following an unforeseen incident.

As such, organisations can quantify disaster recovery through their ability to answer questions like, "How long can my business afford to be down?" and "How much lost revenue can I tolerate through outage?" By defining these answers carefully, organisations can typically justify their disaster recovery projects to senior management.

With enterprise application integration, return on investment can be calculated in terms of cost savings. Historically, companies have made short-term investments in standalone enterprise application integration projects. This can lead to conflicting objectives and a duplication of costs and resources, so that many companies fail to see evidence of return on investment.

I would recommend a more disciplined and holistic approach to integration through development of a co-ordinated programme that maps out clear links and dependencies between projects and highlights quantifiable objectives. Here, the programme carries the cost of the investment and co-ordinates all projects based on, and benefiting from the enterprise application integration initiative, while the individual projects account for the return on the investment.

The end result is enterprise application integration initiatives that deliver on a business case, reduce duplication, improve the use of IT resources and clear the path to realising significant return on investment.



The experts

Computer Weekly has put together a panel of experts. You can draw on their specialist knowledge to solve a problem. E-mail your questions (or your own solutions to this or the next question) to [email protected]

Certus www.certus.org.uk

NCC Group  www.nccglobal.co.uk

Deloitte &Touche  www.deloitte.co.uk

Cranfield School of Management www.cranfield.ac.uk/som

Computer Weekly 500 Club www.cw500.co.uk

Henley Management College www.henleymc.ac.uk

AMS www.ams.com

British Computer Society www.bcs.org.uk/elite

Impact www.impact-sharing.com

The Infrastructure Forum www.tif.co.uk

Dominic Barrow www.dominicbarrow.com

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