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Using the Different Sides of ROI Effectively
Victoria, Canada - January 02, 2006

The phrase “IT investment” is said to be an oxymoron that continually reverberates in the minds of many business executives particularly in less IT mature countries.    Unfortunately, what many of these business executives fail to recognize is that IT is business and that IT is part of the ante of being part of the business world. We live in a digital economy that has begun almost two decades ago.

Surveys of senior business executives across industries continue to indicate that they do not believe IT is critical to their business success. As a result, IT executives face increasing scrutiny on IT investments.    Of these senior business executives surveyed, over 65% believe previous investments in IT never met its ROI (or some kind of methodology disguised as one). This disappointing figure compelled me to make this the theme of XMGize.

We have observed that fast-growing companies (particularly those coming from the mid-market segments) frequently indicate that IT is crucial to their success. Their pursuit for competitive advantage helps explain the growing attention toward evaluation of returns for innovative investments. Ever more now than before, IT investments are becoming a critical and major component of the mid-market's budget particularly as we see a surge in incremental increases in infrastructure and desktop implementations, ERP implementations/upgrades, system rewrites and infrastructure enhancements within the Asia Pacific region.

Now here is the skinny for the wise IT executive to consider: Although Return on Investment has been the standard measure in determining investment decisions, the model has been poorly adopted unfortunately. Going back to basics, the value in the Return on Investment model is in the maximization of the return on IT investments. In many of the organizations studied for both small, mid and large enterprises within North and South East Asia, IT investments are measured using vendor offered tools from traditional players such as IBM, Microsoft, Oracle and SAP. Using these (most often free) vendor supplied tools, we have continually observed the use of non-transparent sets of assumptions, incomplete requirements, unlocalized industry average values and qualitative/quantitative metrics that do not factor in appropriately to the situation of the client organizations. A discerning pattern emerging from our studies showed that organizations heavily reliant on these vendor tools are those that see their purchase as a “black box” that will produce something of value (fingers crossed) in support of the company strategy and direction. To put it bluntly, business and IT executives who took this investment valuation approach did not fully understand business/IT alignment, its current IT environment, and how this tool will effectively meet its rate of return.

Therefore, in the absence of a highly contextual Return on Investment model and a valid set of assumptions, savvy business and IT executives should consider an appropriate and complimentary evaluation model that focuses on the “Risk of Investment”. Unlike the traditional Return on Investment model, the value in calculating the Risk of Investment is in minimizing the risk of IT investments. Adopting a Risk on Investment approach is a clear acid test in organizations to demonstrate their understanding of the intricate nature of their IT portfolio and how this new investment contributes holistically to the organization's IT ecosystem.   

Caution: This does not routinely mean continually price-slashing the vendor which has been a custom in many Asian countries.
(And unfortunately, price-slashing has a deleterious effect in the growth of any local IT economy based on what was proven in XMG's Global Software Industry Maturity Model).

In the end, it comes down to assessing the “value” of any IT investments by understanding your own IT portfolio, objectively assessing how your IT ecosystem must evolve, and how the investment will contribute to the company bottom-line. This will require taking a more rounded view of IT investments, using your own set of assumptions, credible localized industry metrics, and taking on a risk-adoption attitude and approach.

Article written by Lauro Vives
for XMGize column of Computerworld