Return on Invesment Analysis on IT Projects

What is ROI Analysis?

ROI Analysis is an approach to build a financial business case, decision makers evaluate the investment by comparing the magnitude and timing of expected gains to the investment costs.

Fig. 1 Return on Investment
Return on Investment has reigned as the measure of not only overall corporate performance, but as a metric in determining allocation and use of corporate resources as well.


Fig.2 ROI Categories for IT

There are two types of ROI for IT projects:
1. Financial benefits include impacts on the organization’s budget and finances (cost reductions or revenue increases).
2. Non financial benefits include impacts on operations or mission performance and result:
- Improved customer or trading partner relationships resulting from implementing technology-based solutions.
- Internal efficiencies related to business cycle time, inventory reductions, etc.
- Metrics related to market growth, increased sales volume, and new market penetration.

Traditionally, companies leader were mostly thinking of “financial” benefits when discussing the ROI of an IT investment. Today, business leaders considered highly the “non financial” benefits of IT investments.

Technology is frequently the subject of ROI analysis. While senior IT and non-IT managers require substantiated ROI analysis for new technology projects, historically IT investments do not have a strong track record for
1. Staying on budget,
2. Being completed on time, or
3. Demonstrating value to the business.
Except for instances where ROI is determined for newer technology replacing current technology, measuring ROI of IT remains a black art.

Challenges in Measuring Technology ROI

There are several challenges in measuring ROI for technology projects:
1. Lack of adequate metrics
- Difficulty of measuring cost savings
- Difficulty of measuring cost increases (help desk expenses, training, impact to existing processes)
- Financial impact on business (new customers, markets, etc)
- Productivity improvements/gains
2. Inadequate IT asset management required for TCO
3. Inability to measure soft returns
- Customer satisfaction
- Improved time to market
- Competitive advantage
- Non-financial impact on business (customer relationships)

The expected ROI of a project can be predicted to a degree based on the type of project under consideration. Projects with goals that impact business processes or execute business strategies are typically more difficult to measure—thus the adage that the projects that matter are the most difficult to measure.

Common IT Project types
1. Improvements in Technology Infrastructure
- Results: low if not negative returns are more likely, given increased up-front costs such as training, support, and infrastructure issues.
- Characteristically, projects are associated with lower risk and lower returns
- Examples, replacing existing server environments
2. Task Automation
- Based on technology investments, or capital investments in general, judged on ability to contribute to output, raise productivity or lower costs.
- Characteristically, returns should be quick, as the ability to create a long-term competitive advantage and result in greater market share or profits in unlikely.
- Examples, desktop automation, electronic forms applications, call centers, and electronic project management
3. Applying Technology to Business Processes
- Investment is applied to business processes.
- Result in significantly higher rates of return than single-task automation projects, but carry significantly higher risk. Returns are more difficult to measure given that multiple organizations could be impacted and at least a portion of the returns are soft.
- Additional costs such as added training and support for users, extranet security, and the impact to other applications and data that required re-architecting. Also there is risk with information being used incorrectly to make decisions
- Examples, extranet technology (transformed the way business interact with each other (retailer/supplier).
4. Business Innovation From Technology—Building Sustainable Competitive Advantage
- Investment is tasked with transforming the business, and innovation is the key.
- Characteristics, heavy investment (in terms of equipment, training, people), high risk in term of success (ex.time), and unlimited returns.
- Return is based on the ability to survive, which is hard to quantify
- Long implementation tie provides ample time for market conditions to change, corporate strategies to change, organizational structure and politics to change, making true measurement of the impact of the project nearly impossible
- Example, data warehouse technology, change: the way a retailer replenishes stores, financial services company markets its products, insurer analyzes claims. Data Warehouse implementations can realistically take years—three years typically. Payback period for a successful project is two years or longer.

Case Study of IT ROI
- Microsoft Exchange Server Lifetime Products
- Research by Nucleus Research, http://nucleusresearch.com/library/microsoft-roi/f3.pdf
- The upgrade to Microsoft Exchange Server 2003 has enabled Lifetime Products’ employees to access their calendar, contacts, and e-mail remotely and with mobile devices ― resulting in a significant increase in employee and executive management productivity as well as cost savings.


Fig.3 ROI Case Study

Calculating The ROI:
- Nucleus quantified the costs of software, consulting, personnel, training, and other investments over a 3-year period to quantify Lifetime Products’ total investment in upgrading to Microsoft Exchange Server 2003
- The key direct benefit calculated is the avoided cost of hiring an additional full time IT employee to handle spam issues.
- Indirect benefits include the increased productivity of personnel in the sales, engineering and IT departments through improved remote email access, and the increased productivity for the rest of Lifetime’s employees due to improved spam filtering.

References
- “Measuring the Value of Information Technology”, Computer Economic$ Report; Aug 1998; 20, 8; ProQuest Computing, pg. 4
- Ward, John, Peppard, Joe, “Strategic Planning for Information Systems”, 3rd edition, 2002, John Wiley and Sons.
- Case Study: http://nucleusresearch.com/library/microsoft-roi/f3.pdf
- http://www.solutionmatrix.com/return-on-investment.html
- http://www.rms.net/lc_faq_other_roi.htm