Information technology (IT) projects and initiatives are about change or, at least, the bar is about to be raised. Change is about transforming the current state into a desired state. However, when and how do we know that we have reached the desired state? How do we know what the business gained from the IT project?
Often, when companies embark on any IT initiatives like enterprise resource planning (ERP), customer relationship management (CRM), business intelligence (BI), or knowledge management (KM), the focus is purely to digitize operations, cut operation costs, improve productivity, and shorten decision-making cycles. However, in general, there are very few (if at all) business impact studies and analyses conducted on IT projects, measuring how much the business has gained in terms of tangible and intangible values, like intellectual capital. Imagine that you have managed an IT project, after which management or the board of directors asked how the company benefited. Will you be able to present a returns and business impact analysis to them?
Measuring the return on an IT expenditure at the company and process level is crucial to align IT strategies with business strategies. In doing so, shareholders and stakeholders will have a good view of what was initially expected from the IT initiative and what benefits were gained. It also synergizes IT strategies and business strategies to meet common business-oriented goals.
By measuring the gains expected from implementing a new IT solution, users can eliminate any potentially poor IT investment. Thus, justifying the purpose of the IT project and how the project will benefit the organization is crucial.
Setting the Stage
Any initiative or project should have objectives and expected returns, and IT initiatives or projects are no exception. In practice, objectives and expectations are the basis of how to strategize, plan, and manage projects in order to accomplish the returns as expected.
To start, before even looking at any business software or application, think about the following:
- Who is going to benefit from this initiative? The sales department, operations, finance, or the company overall?
- Based on who is going to benefit from this initiative, who should collaborate on this initiative or project? Involve the project team and the affected staff as early as possible, and prepare them for return on investments (ROI) assessments.
- What are objectives or changes expected at the end of the project? Stating objectives will help to create a clear picture of what is to be achieved making it easier to monitor the project.
- What values will the organization gain from the objectives set? For example, is the goal to improve productivity by 5 percent? by more? By setting expected values, a benchmark is created that can be used to measure the project.
- What are the metrics and variables for this project? Based on the effectiveness and efficiency factor, you need to formulate the metrics and variables that will help you collectively measure the outcome.
By addressing these questions, an organization can be steered through a clear and guided path, and can be confident that the IT project will not labeled "overkill" or worse still, "a poor investment". It also creates a clearer picture whether the IT project constitutes an economical investment. For example, if operations inefficiency is costing the company $200,000, and after an evaluation, the available solutions work out to be an average of $300,000, then, the option to improve will either not make economical sense, or the ROI will simply take too long to be realized.
Of course, a shorter ROI cycle is not only desired, but is essential to the survival of the company, given the rapidly changing nature of business. Cases that involve longer timeframes have much more complex their measurements, because the variables involved change constantly. That is why, for example, ambitious CRM projects with a broad scope, and span over a long period of time are often difficult to justify.
What to Assess
In any business, there are indicators of performance. Whether financial or operational or based on external, or internal assessments. By providing a macro view of the company's performance and growth, these indicators give directors and management insight on how the company is performing as the whole and what areas they should focus on for improvement.
Indicators are like the dashboard of your car telling you how fast you are going, how much fuel is left in the tank, how hot the engine is, and how far you have traveled. This current information is needed to make the right decisions, like whether to look for the next gas station, or if you should slow down. These pre-emptive signals from your dashboard are fully appreciated when used during a cross-terrain drive where resources are scarce. From a business perspective, indictors include the limitations of time, money, and human or machine capacity. Without these indicators, management will only know how well the company had performed financially, as most companies routinely focus on financial analysis. However, this is an era of information-intensive business environments that require accurate and decisive actions that businesses have to commit to. The lack of timely information and knowledge about the company's performance will only result in the inability to effectively compete in the industry—and will even prevent setting realistic goals.
Forming key performance indicators (KPI) for the business is a good way to start this process, because a business-oriented initiative for the company's strategies, planning, and management practice must be considered. The IT projects that will be implemented are intended to contribute some changes to the indicators. Hence, if there aren't any changes to the indicators, then, the change is either not executed properly or it was an unwise IT investment.
When to Measure and Monitor
Most software vendors conduct ROI analyses at the end of the project. However, this only gives a vague assessment of the change, because no benchmark has been set for any basis of comparison. In some scenarios, the analysis is devised by the vendor. However, ROI analyses should always be planned by the customer, because the customer knows the business better than the software vendor. A good operational start is to formulate a comprehensive project schedule and plan clear ROI activities that will be used to realize the true value of the project with the vendor.
Plan and include the pre-intervention and post-intervention stage assessments into the vendor's project schedule if they haven't been included, and execute the ROI analysis on the IT project. It is also appropriate to organize the parties involved, determine responsibilities, and formulate improvement metrics at the project's initiation. Creating control groups within the internal staff will also help to determine the difference in the outcome. Control groups consist of two separate groups of internal personnel. One is involved in the IT project, and the other with remote dealings in the project. Both have should have similar roles and work responsibilities. This sets the stage for comparing performance differences within the company.
Table 1. ROI Stages
Formulate control groups and performance metrics
Capture current metrics
Control group interviews and surveys on changes
Collect post implementation results
Consolidate and compile all data collected
|Typical Project Phases
||Business/ GAP analysis
||Installation and configuration
||Live operations Cutover assistance
The ROI assessment shouldn't stop after the project closes. It should continue for at least six months or more. When the cutover of the parallel, running and live computer systems have been completed and migrated to the new system, the measurements should still continue. However, at times, the variables used to measure return will change what is measured. A good ROI plan should include at least six months' to a year's worth of analysis. It is good practice to review the ROI analysis because it measures ongoing improvement and the state the company is hoping to achieve.
Isolate, Isolate, Isolate
Finally, an effective ROI assessment should isolate the effects of the project. No ROI assessment is going to be accurate if there is no isolation. Isolating the effects of the project includes the determining what external and internal factors will influence the outcome of the project. This is done before the project is carried out and may include
- Economic turnarounds. For example, the retail industry is cyclical and picks up during the holiday session. If a new ERP system is implemented during that time to overcome inefficient order taking and supply chain problems, then the gains should typically be measured against the previous year's holiday session. However, what if an economic downturn occurs and consumers cut their spending? That will definitely impact on the number of orders, and the supply chain problems would look as bad as before.
- Staff turnover. Sometimes, inefficient operations create a history of high staff turnover. Inefficiencies may caused employees to work overtime most of the time. Now, whenever staff leave, time and resources are spent to employ and train someone else to take over. Newly trained staff are normally slower in their work compared to their peers. There will be a negative impact on productivity even with a new system is in place.
- Staff efficiency with computer systems and the mentality to change. If generally, the staff is inefficient with computer systems, there will be a longer learning phase for them to adapt and adopt the new system in their work.
- Corporate culture. The culture of the organization significantly contributes to the ROI result of any project, especially how the company operates. When an organization does not have a culture of collecting and analyzing tangible and intangible data pertaining to any corporate initiative that they embark, it is difficult to determine the confidence level and accuracy of influencing variables.
These are only a few factors that can impact ROI. Determining what the factors are should only be done by the internal project team, not the vendor. Reason? Putting the vendor in a position to unearth the root of the problems may result in a bias assessment.
It is also advisable to carry out interviews and surveys with the internal staff to rule out other factors that may contribute any negative impact to the business during the IT project.
Get what you have invested in. That's what it's all about. Every IT project should provide a certain level of return, big or small. Still, it is essential to set out clear and reasonable expectations on how the investment will impact business and what value it will bring. If the expected returns are just arbitrarily set, use vaguely drawn out measures, or are in short, a perfunctory exercise by management to avoid being labeled "antiquated", the project will do more harm than good impacting both the bottom line and company moral. It will also lull management into a false sense of security believing there is a "magic pill" for business issues in technology.
Ultimately, it comes down to only one thing, "Know thyself". Sort out business issues and challenges on the business level first before embarking a IT project. No IT project is a magical solution to a company's issues or challenges. It can be a very powerful tool for management, but its role can only be determined through a detailed business analysis, which should be done before talking to any software vendor. Knowing your business and the critical information and performance indicators that are used in ROI assessments for IT projects will benefit an organization greatly. Also, knowing the limitations and constrains of business and technology offerings will create a realistic ROI. Pushing these limits too far will only hurt the IT project and the company's involvement in the project.
As for increasing the credibility of the ROI, squarely address the issue and ask: "Is this IT project really creating a positive impact on business?" Isolate as many that will influence the impact of the project factors as possible. A business environment with too many elements will affect the business' performance. Know them the same way you know when the market is going for a turnaround.
Don't just stop the assessment right after the project. Include the assessment during management meetings and seek out ways to further improve. Continuity is the key to gathering and validating the effects on a project that are less apparent at first glance. After all, it is a business initiative to improve the environment and operations, not an IT initiative.
It is time for companies to demand the returns and gains that vendors are bringing to the table. Explore your gains and returns. Don't just focus on features and functions of an IT solution. Only profit, expense, and investments can ensure the existence of a company. IT helps address "bread and butter" issues, and the key to differentiating a company from another rests in other qualitative issues. Correctly leveraging IT tools to address these issues will give a company the qualitative and quantitative edge it needs to face its business concerns. After all, why spend money when there isn't anything to gain for the business?
About the Author
Freddy Fam has over eight years of experience as a IT management consultant in the software industry related to enterprise resource planning (ERP), customer relationship management (CRM), business intelligence (BI) and knowledge management (KM) solutions. He consults and conducts executive workshops that are designed to equip business owners with the know how on how to effectively and efficiently manage IT resources. He can be reached by e-mail at email@example.com