| Make
a firm case for return on investment
15.12.2003 - CCL News
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.
Piotr Nahajski, director
of consultancy Macarthur Stroud International, said
the financial justification for
IT investment drawn up by IT directors was often
let down by a lack of detail.
"
The temptation is to put in soft goals, such as improving
the IT system's response time. This needs to be explained
in terms of hard financial benefits for the business,
such as reduced costs."
He added that companies needed to think about the variety
of ROI, including availability and quality of crucial
information to underpin customer services and the future
benefits of a technology, rather than focusing solely
on the cost of ownership.
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..
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