The Business Case

Some experts are souring on conventional ROI analysis because the numbers seem to come out of thin air. Here's what's coming next.

December 23, 2002

7 Min Read
Network Computing logo

Well, not quite. The project is on hold because the chairman didn't buy Yagley's arithmetic. "He said, 'Show me concrete savings. Who will get laid off?' " Yagley says.

It's a scene being replayed in many IT shops. Management wants evidence of ROI, and, under intense pressure, IT is grasping for numbers. Trouble is, executives often don't trust IT's calculations because they don't view tech managers as business experts. Worse is the perception that IT has a stake in pumping up the numbers.

Now, more IT organizations are moving beyond pure arithmetical ROI assessments to a project-planning methodology that treats each IT asset something like a stock in an investment portfolio. Line items that are delivering returns get more funding; lackluster projects get the ax. The stock analogy isn't perfect--savvy investors don't buy high and sell low--but there are signs that interest in this portfolio approach will intensify as IT organizations try to regain credibility lost during the freewheeling tech boom and subsequent bust.

All the major tech consulting firms are championing this approach, and they say they're signing up clients at a rapid clip. One in five IT shops will have adopted the practice by next year at this time, predicts Meta Group analyst Howard Rubin.

The emphasis is on phasing in technology investments rather than jumping in feet first. Too many large, long-term IT projects are approved based on flawed assumptions because the business case is made so early, when the least is known about how the project will impact the business, analysts and customers say.The problem with good old-fashioned ROI modeling is that "you're asked to develop the business case before you have all the facts," says Julie Kapsch, an IT vice president of strategic services at CBS/Viacom. "With the investment-portfolio approach, you're saying we think this will be the payoff, but if you give us three more months to assess, we'll give you a more detailed model."

Urged on by Meta, CBS/Viacom started measuring IT investments this way about three years ago, Kapsch says, about the time Viacom and CBS were merging and executives were adamant about analyzing all capital investments. Most projects are reviewed monthly, using grades of green, yellow and red to show whether they're "on time, on scope, on budget and on value," Kapsch says.

Periodic Re-Examination

Perhaps most important, the investment-portfolio approach calls for sponsorship and collaboration among departments and disciplines. This way, there are fewer blind spots--and there are more people to hold accountable. "Program management, program planning, IT and business management have to do the benefits analysis together," Rubin says.

It doesn't replace ROI analysis. Rather, it adds a discipline of periodic re-examination. "At every phase of an initiative, one of the exit criteria is making sure the asset is still performing," says Giga Information Group analyst Alistair Stewart. "The challenge is to ensure that, month to month, quarter to quarter, you're making the necessary course adjustments."

Survivor's Guide to 2003



Mobile & Wireless
Network & Systems


Storage & Server


Business Apps

Digital Convergence

The Business Case


On that basis, CBS/Viacom has killed several application-development projects this year alone (Kapsch declined to identify them). In the past, these projects probably would have continued to receive funding, if only to justify previous spending, she says. This is how projects end up taking on a life of their own in many organizations; no one wants to pull the plug. "Three years ago, we just got the money and never tracked the benefits," says Kapsch, who reports to the CIO.

Over time, this new approach is helping CBS/Viacom apply more resources to new, strategic IT projects and reduce the cost of maintaining older systems. Plans are to digitize the audio and video produced by CBS, its affiliates and the Infinity Radio group, a project that Kapsch says would not have been possible had CBS/Viacom not halted funding for underperforming projects.

Smaller IT shops also are beginning to question the value of conventional ROI analysis, especially those provided by vendors. When New York public relations firm Burson-Marsteller became interested in issuing BlackBerry e-mail pagers to mobile workers, Research In Motion, the maker of the devices, estimated a savings of as high as $49,000 per employee, per year, based on saved time and faster responses. "I realized there was no way I could hand that to my CFO because he'll say it's rubbish," says CIO Jeff Marshall. "It was just too ridiculous."

Instead, Marshall worked within the confines of what he was authorized to do on his own. He established a pilot group of a handful of senior account managers. Then he watched closely and collected the managers' anecdotes about using the devices to see what benefits they were receiving from them.One senior manager recounted a story in which his BlackBerry device saved the day while he was on the road in Asia and unable to use his cell phone. He received an urgent e-mail from an important client in Russia and was able to quickly resolve a crisis.

"Without the BlackBerry, we would have disappointed the client. Instead, we gained business," Marshall says. Not long after the episode, the client re-upped for a year.

Marshall has used the same approach to persuade his bosses to invest in a KM (knowledge management) project. Even Lotus, the KM vendor, tried but couldn't quantify the returns Burson was realizing, so Marshall depends on anecdotes. Stories always emerge about how the KM system helps Burson's 1,600 employees in 77 offices service clients like one, cooperative unit.

Indeed, analysts say ROI doesn't work all the time. It's good for industrial businesses but doesn't apply well to knowledge-based industries, says Gartner analyst Roger Fulton. For those businesses, customer loyalty is a priority, but it's almost impossible to tie IT investments to fostering that loyalty and then place a value on that loyalty, he says.

Even when ROI analysis is the way to go, be careful about trusting vendor-supplied calculations. "There's no such thing as average ROI," says Rebecca Wetteman, an analyst at Nucleus Research. She uses the example of Microsoft's BizTalk Server. A shop that already has a heavy investment in Microsoft technology will see much higher ROI than one that doesn't. One size doesn't fit all.Sign of Maturity

Painful as the transition might be, it's important for IT shops that want to evolve beyond being cost centers to adopt more sophisticated ways to justify investments. It's a sign of maturity when IT is held to the same standard as other corporate departments, Stewart says. "IT has always been viewed as a necessary evil. It's all about cost, cost, cost. TCO--it's so primitive," he says. "Cost is one part of the equation, but there are benefits and options that are part of investments in technology, and we need to understand those better."

As a result, companies may place more emphasis on a technologist's business acumen, just like they're doing for managers in human resources, accounting and product development. "This certainly challenges the way organizations manage the HR process within IT," Stewart says.

Indeed, even the consulting firms, which at one time looked for technical hotshots, have had to recruit differently. Stewart calls himself "a recovering accountant."

IT must change because the honeymoon is over. The proof: In 2002, average IT spending decreased as a percentage of revenue for the first time, Rubin says. And all but four of the 21 industries Meta tracks reduced IT spending.Like Yagley as he struggles to earn the trust of the Valley Industries chairman, all IT managers will have to work hard to regain credibility. It may be the only way to spark an IT recovery.

David Joachim is Network Computing's editor/business technology. Write to him at [email protected].Vendor-Supplied ROI

Pros: Easy and inexpensive method to justify IT purchases.

Cons: Figures are "averaged" and may not reflect returns for an organization like yours; positive returns often inflated.

Internally Generated ROIPros: Forces you to justify IT purchases with hard numbers tailored to your type of business; forces IT and business units to collaborate; bridges communication gap with financial management.

Cons: Organizational pressure and lack of business expertise often produce unrealistic numbers; analysis is performed early in the life of a project, when little is known about returns; numbers are seldom revisited after project goes live; difficult to apply to knowledge-based businesses.

Investment-Portfolio ROI

Pros: Encourages periodic re-examination of assumptions and results; rewards experimentation; requires collaboration among IT, finance and business units, fostering accountability.

Cons: Can become burdensome if reviews occur too often; still difficult to apply to knowledge-based businesses.

Stay informed! Sign up to get expert advice and insight delivered direct to your inbox

You May Also Like

More Insights