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Stuck on ROI

Stuck on ROI

Executives and senior managers have learned to greet ROI claims with a generous sprinkle of scepticism, doubting claimed benefits can be realized and that identified costs will fall in line

What's a good CIO to do when facing a clamour from executives, boards and shareholders to present a compelling business case, while knowing almost no one will believe that business case when presented?

The Central European Bank director was bristling with frustration. He routinely performed return on investment (ROI) calculations that promised spectacular returns, he told Cutter Consortium publisher Karen Coburn - sometimes as much as one thousand percent - yet at the end of the day, IT was not delivering anything useful to the business.

"Ah," said Coburn, "I know what you mean. It's pretty clear the root cause of most of the mistrust with ROI has been IT's history of not always delivering anything of use to anybody."

It has become almost a ritual for business cases for IT projects to be met with high levels of mistrust and suspicion. Executives and senior managers have learned to greet ROI claims with a generous sprinkle of scepticism, doubting claimed benefits can be realized and that identified costs will fall in line. And it is undeniably true that in too many cases it is a mistrust forged in the fires of bitter experience. Executives once bitten by overruns, delays and a failure to fully realize promised goals are likely to have the encounter burned into their brains and souls.

The issue has become so pressing the August 2004 Cutter IT Journal (CITJ) was dedicated to trying to answer the question "Analyzing IT ROI: Can We Prove the Value?"

Business cases - the financial models and supporting documentation used to evaluate IT investments - are among the least understood, least trusted tools that managers encounter in running a technology operation, notes CITJ's guest editor Mark Cotteleer. Almost no one believes the work product that is eventually delivered. Yet business cases are constantly being demanded by executives and boards.

In fact "nobody believes the ROI" was a sentiment expressed by numbers of participants at Cutter Consortium's conference in Boston last May. It is a challenge that business and IT professionals have wrestled with for decades. Prominent IT gurus Erik Brynjolfsson, Nicholas Carr and Paul Strassmann, among others, have questioned whether a business case even exists for most projects, notes Clarity Consulting president and Cutter senior consultant Ian Hayes.

Yet Hayes, who has advised dozens of Fortune 1000 companies on a variety of IT issues, points out that our finance textbooks (not to mention our CFOs) tell us that we have a fiduciary responsibility to shareholders to invest the firm's capital wisely. That means not investing money unless there is a guarantee of a return.

"Experience in the field reinforces the point. A recent Cutter survey, for example, showed that 63 percent of IT executives are required to perform ROI analyses in order to justify IT investments," Hayes says. "Forty-two percent of respondents indicated that these policies are more rigidly enforced than they have been in previous years. Other research, published in CIO Insight, indicates that as many as 87 percent of firms require the development of a business case prior to investing in information technology."

Nevertheless, Aberdeen Group, which last year reviewed users of project portfolio management (PPM) software to look for real examples of ROI results, confirms that while most firms talk a good story regarding ROI, few actually live it. Aberdeen Group's survey results showed that an "eye-popping" 5 percent of firms actually collect ROI data on PPM implementations. While most respondents could identify the kinds of benefits that they expected and could even identify some benefit types that have been realized post-implementation, the researchers found that when it came to documenting key processes, metrics and so forth, pre- and post-implementation, virtually none of the firms could identify their ROI results.

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