Smart RoI formula for guaranteed success

: A practical and realistic approach to ROI formula calculations can ensure that projections for return on IT project investments are achieved as planned.

The business case for IT project investment is invariably bolstered by the promise of attractive return on investment (ROI). However, it is important that projected ROI is actually realized, lest the reputation and credibility of the CIO and IT department be sullied among top management of the organization. Here are four ROI formula approaches to ensure that the chasm between ROI promise and delivery is minimized, and realistic return on investment is achieved.

1) Avoid new technology in phase one:  The first ROI formula step dictates that experimentation with new technology should be avoided in the first phase of the project, especially in production environments, unless inevitable, and then too only with a complete buy-in from the user department.

This is because introduction of new technologies may increase CAPEX, delay breakeven, and maybe even derail the project. Take the example of an automobile company, located in the coastal belt, opting for a data center change. Previously, it had conventional servers with conventional cooling. With the change, the company is installing a new type of blade server and this requires in-row cooling. Although the new technology in itself may ensure quicker ROI, the company may need higher cost and redundant options for a DC located in a remote coastal area with high humidity and difficult access.

Experimenting with many new technologies in the initial phases is a recipe for ROI setbacks, and this may result in desirable new technologies getting unnecessarily rejected. The second or the third phase of the project is a better time to experiment.

2) Involve the end user:

Another sure-shot ROI formulato ensure projected returns for IT projects is to keep end users in the loop during project execution. Ultimately the ROI on IT assets will be realized by the revenue per business user. There should be reasonable sync between business and IT teams, regarding utility of the asset or technology.

The assumption by IT that a particular technology will benefit the business may be belied by users being unable to use it effectively due to improper training by the OEM or incompetence of the SI. This second ROI formula dictates that the IT implementation needs to go down well with the intended users in the business.

3) Do not expect quick ROI, when innovation is key:

If quick ROI is the objective, innovation could get sidelined. One must factor in that training and familiarization with new technology will postpone the onset of ROI. For example, at Konkan Railway Corporation Limited (KRCL), during ERP migration in 2006, when the application changed from 4-GL to Java Enterprise (J2EE), it took a long time for the users to get comfortable with the new interface. Subsequent rollouts of J2EE applications were implementable much quicker. Now our J2EE technology ROI is visible, and our ROI formula reflects this.

4) Vendor recommendations could be exaggerated:

Don’t go by the lofty claims of the vendor’s ROI formula estimates of a particular technology or product and its payback periods. Insist that the vendor reworks the ROI formula based on your stipulations. By default, vendors take the lowest power cost in India, just to boost ROI projections.

For example, at KRCL, when we converted from normal cooling to in-row cooling (central data center) and rack cooling at remote stations, we made the vendor do detailed re-calculations on the ROI  (payback period in this case) and the power savings results differed dramatically. The payback period now crossed the warranty expiry and support costs kicked in.

We made the vendor re-optimize the design and extend the warranty, to show viability. Thus, pick holes in the vendor’s ROI spreadsheet calculations and make it more realistic.

About the author: Vijay Devnath is chief IT manager at Konkan Railway Corporation (KRCL). He has varied experiences in managing maintenance, technology, personnel, and materials in areas of electric locomotives, traction distribution, traction OHE construction, and IT.

(As told to Anuradha Ramamirtham)

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