The Real World

However much CIOs and pundits pay lip service to the notion that ROI is important, a recent survey of 464 senior executives by marketing communications agency Doremus concludes that in the real world, ROI is not the be-all and end-all when it comes to giving an investment the thumbs up.

The survey, conducted with publisher The Economist Group, polled C-level executives including CEOs, CFOs and CIOs regarding their business spending habits. Fifty percent said they regularly spend money on projects they believe in whether an ROI case exists or not. CIO (US) reports such reliance on gut instinct is more prevalent among executives both at larger companies and those in high-margin industries such as pharmaceuticals. In such cases, says Doremus's director of research, Hope Picker, executives may go with their gut rather than a firm ROI figure because they are allowed more room for error than executives at low-margin companies.

In terms of major spending, "faith in their own intuition" still figures prominently, with 44 percent of respondents saying they do not require ROI analysis if they strongly believe in the project. Only 5 percent say they never rely on gut instinct, says Picker.

Even so, of executives who claimed to believe that shareholder value is a critical component for making corporate decisions, 75 percent reported requiring ROI analysis before making an investment choice. But as every CIO who has ever tried to put an ROI on a security measure knows, delivering an ROI on many technologies can be an extremely tough ask.

Explaining the Productivity Paradox

Scepticism about the returns from IT investments is a phenomenon almost as old as IT itself. In 1987 it became tagged the "computer paradox", when Nobel Laureate in economics Robert Solow made the famous quip: "We see the computer age everywhere except in the productivity statistics." Much loved by economists, Solow's "productivity paradox" recognizes that productivity growth has slowed every decade since the 1960s while investments in information technology have grown dramatically. Some take this as proof that information technology does not affect productivity.

Yet for CITJ contributor Paul Strassmann, recognized as one of the 12 most influential CIOs of the past decade by CIO (US) in 1997, the answer to Solow is that you cannot prove exactly what contributions computers make because it is impossible to replay history to see what might have happened under different circumstances. Nor can you measure the worth of the future value of IT without the gift of prophecy (which is notoriously absent among technologists).

"All you are left to do then, in the quest for valuation of IT, is to evaluate the best decision you can make at the time when you commit to a credible plan," Strassmann writes. "The logic of such reasoning propels you to the most obvious conclusion: making no changes to IT as it is presently can be the only valid basis from which all other options can be assessed. If your budget inquisitors can accept such reasoning, you may be able to claim (and get away with it) that the value of IT can indeed be calculated using conventional methods of financial analysis."

Better, perhaps, than trying to come up with ROI figures no one can greet with a straight face.

"So far - to my best knowledge - nobody has been able to demonstrate that there is a positive correlation between money spent on IT and sustainable profits. Sure, there are articles about the positive contributions of IT. But the proof that could be applied to justify greater IT spending as a sure cure for poor financial numbers is still missing," writes Strassmann in an article called "Six Rules for Finding Value" in CITJ.

Strassmann says the quest to demonstrate the directly measurable value of IT can be added to the list of fascinating but hitherto unfulfilled ambitions to attract academic fame or consulting contracts. Sadly, academics never reveal their data sources or make available the metrics that would let outsiders independently verify benefits.

"What is always missing is a repeatable technique for performing the calculations that would satisfy a firm's methods for making investment decisions. Even in the rare cases where someone detects a trend favouring IT, one cannot find evidence that the cases picked to support the assertions were not biased," Strassmann says.

"Just about everything that has been published on the subject of IT value can be found in either academic journals or sales brochures. I regret that I have not yet found a single academic paper that could be used to back up my frequent budget presentations . . . With regard to the vendors' projections of huge ROIs from IT investments, a prudent CIO would be well advised to abstain from using such tainted goods."