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Whose ROI is it Anyway? Part One: Introduction

Written By: Dennis J. Crane
Published On: April 12 2004

Introduction

After a few years of incredible hype and some very wishful thinking, enterprise software has finally returned to reality. Plans and promises that assumed the repeal of business fundamentals have disappeared along with the sky-high stock prices for some software vendors. But, we've been here before.

In the early 1990s, we thought manufacturing automation would revolutionize business for all time. And in some ways it did. But it did not eliminate the workforce and all the attendant issues of human capital as some advocates envisioned. Nevertheless, automation became a powerful tool in the business arsenal for productivity and growth.

Similarly, most enterprise software spins through a crazy phase. Then it settles down to capture a valuable place in modern productivity and growth.

What still floats around in hyper-space is how we measure the return from enterprise software investments.

This is Part One of a two-part note.

Part Two will continue the discussion.

What is ROI?

The concept of ROI (return on investment) is not new. It's quite straightforward. ROI relates the benefits of a project, initiative or purchase to the associated costs and investment. It helps compare different programs and investments.

Doing the ROI math is easy. Deciding what numbers to plug into the calculations can be tough. Making certain you understand the scope and dynamics of the whole program or initiative presents the great challenges.

ROI—Upside Down, or Backward?

When I hear the phrase "return on investment in information technology," my ears perk up. Often, I cringe. In too many cases, this question seems backwards, upside-down, or both. Return on investment happens in the context of overall business processes. It's very tough to isolate it to a piece of hardware or software.

I spoke recently with a Microsoft executive. He called attention to a Microsoft campaign to help customers and channel partners with ROI evaluation. Being Microsoft, they took the liberty of re-labeling this ROI modeling as "Rapid Economic Justification of Technology." The vested interest seems obvious.

Rather than try to justify spending money on a particular technology, businesses need to articulate clearly an overall business goal or operational imperative, such as

  • improving customer satisfaction ratings

  • reducing order fulfillment time

  • anticipating and incorporating competitor activity into product design, or

  • collaborating with suppliers to dramatically reduce costs in the value chain—not just shift costs from one company to another

With the business goal and initiative as context, it's then possible to find process improvements and information technology can help deliver results. Successful businesses care about getting attractive return on the overall initiative investment—not just the expenditures on technology.

This starts with understanding how a change in key processes and business relationships could deliver better results. The benefits of doing things in a fundamentally better way sometimes jump right out. But knowing where you'd like to go is easier than knowing how to get there. Getting there requires the right investment mix of time, money, resources, training, and leadership capital. Projecting a realistic ROI—and then actually achieving it—demands careful scrutiny of these factors.

Whose ROI is it, anyway?

With growing frequency, we hear business and IT managers asking a technology vendor to "justify the expenditure" or "demonstrate the ROI" on their particular hardware, software or service offering.

In some cases, this may be possible. Straightforward automation of routine tasks to reduce or eliminate staff expenses, for example. A top executive at software vendor ActivCard told me early in 2003 that his company had been growing well, even in a difficult market, because it has "a very clear ROI story." The company's software addresses needs—digital identity management and security—that top the priority list in many corporations and government agencies. Customers are pre-disposed to buy.

This executive noted that his firm generally does not provide the ROI justification directly to prospective customers. Rather, they refer prospects to a select list of customers who are pleased to tout the ROI benefits they have achieved. When companies deploy ActivCard's technology, identity management, and access control moves from traditional passwords to more efficient and secure smart cards. The automation replaces staff costs associated with password management and administration, security and access control, and loss of information assets. Training requirements are small. Business processes don't need to change profoundly. Simple automation opportunities like this fall on the left side of the figure below.

Nice work if you can get it. But what happens with more sophisticated undertakings— like customer relationship management, supply chain optimization, and collaborative product development? Vendors offer enterprise applications that address these opportunities. Just installing the software hardly scratches the surface of the investment and ongoing costs associated with operating these key aspects of a business differently. Asking a software vendor for ROI justification in these areas presents substantial challenges. The best you can hope for are possibly relevant case studies. The returns that other companies generate usually depend more on changes in their processes, relationships and culture than on the selection of any particular software or technology.

Infrastructure technology faces even more challenge. Infrastructure includes shared capabilities that can provide a foundation for a range of initiatives and programs. Infrastructure can support various enterprise applications and simple automation projects. It's necessary for many undertakings. But infrastructure is not sufficient. You can quantify the investment in infrastructure. However, it is almost impossible to characterize, let alone quantify, many of the benefits.

Asking about the ROI on technology infrastructure is like asking about how many guests the foundation, wiring and plumbing of a hotel will accommodate. None—but just try putting in the guest rooms without that infrastructure.

This concludes Part One of a two-part note.

Part Two will continue the discussion.

About the Author

Dennis J. Crane is the President of Business Navigation Group. BNG assists clients as they chart a course and get underway with new initiatives—products, markets, partnerships, and entire businesses. Over the past twenty years, Mr. Crane has held executive positions in information services and software firms including GE, AOL, Bell & Howell, and SCT Corporation. He has also advised clients including VeriSign, Safeguard Scientifics, Deloitte Consulting, Software AG and investors in numerous early stage software firms on strategy, precision marketing and sales, and partnerships. He is a graduate of the US Naval Academy and holds and MBA from Stanford Graduate School of Business. Contact: www.biznavgroup.com or djcrane@biznavgroup.com.

 
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