Calculating and measuring technology return-on-investment is not strictly a science or an art, but rather "a bit of both," according to James K. Watson Jr., CEO of Doculabs, Inc., who discussed just what this means at this week's Executive Summit 2002, produced by Insurance & Technology, in Phoenix. The art requires that technology executives gain the respect of their business counterparts, while the science has to do with mechanics and metrics that measure payback, such as cost-benefit analysis. Unfortunately, the fact that ROI is not a simple, cut-and-dried concept has left insurance technology executives with something of a "credibility gap," Watson noted.
ROI is essentially "an assessment technique to compare different investment alternatives," Watson said. "It involves two questions: What will be the ROI at a point in the future? What has been the return of investments we made in the past? ROI can't be a solution to solve that second question."
Accordingly, because IT executives have had difficulty communicating the value of IT investments, they have lost credibility not with their peers, but with the large community of middle managers who often have to implement and live with technology investments that fail to meet expectations. "We have to build a conceptual vision and back it up with hard numbers," Watson explained. "But the lack of hard numbers is frustrating."
As an example, Watson cited a situation where an insurance company wished to shift inquiry volume at its call center to its Web site via self-service functionality. However, even though market research shows that the average cost of a transaction could be roughly 20 times cheaper handled via online self-service compared to telephone, it also began to emerge that the self-service offering actually could increase the volume of complex inquiries that require the involvement of a specialist - essentially eliminating most of the anticipated economic benefits of online self-service. Watson pointed out that, once the insurer recognized that its original model was flawed, it could rethink the scenario along the lines of "What changes should be made in the call center environment?" rather than strictly volume shifts - "what-ifs, what's going to happen?"
"In the past there have been two camps," Watson noted. "One camp said, 'We have strategic IT investments that can't be measured.' The other had to do with hard counts" such as desktops installed, number of staff, and licenses. "To be successful, you need to blend the two better - the rigorous science, plus a conceptual picture of how the business will change" as a result of the investment.
Ultimately, Watson argued, there are limitations in the concept of ROI itself. "One absolutely critical trend we see is that people are looking at the impact of IT investments on a firm's balance sheet. The emphasis used to be on savings and revenue - it was focused on the income statement. Today, our clients are also looking at capital. In the financial community, we were focused on growth and income, not on the balance sheet."He advocates broader use of the "return-on-asset (ROA) metric - the productivity of your capital stock. The IT function probably doesn't have enough understanding of how the CFO thinks about the productivity of capital."
Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio