Executives Reveal ROI Tricks of the Trade

THIS ISSUE'S EXPERTS:

Tony Candito

SVP & CIO, Individual Business, MetLife (New York), Elite 8 2000

Cecilia Claudio

SVP & CIO, Farmers Insurance Group (Los Angeles) Elite 8 2000

David Annis

CIO, The Hartford (Hartford) Elite 8 2000

George McKinnon

CIO, Nationwide Insurance (Columbus, OH) Elite 8 2000

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Q: Why does ROI suddenly seem to be a new trend? Shouldn't IT organizations have been practicing sound ROI measurement all along?

A: Tony Candito, MetLife: Many organizations are beginning to look at the IT organization as a line of business within their overall enterprise, thus making ROI calculations appear a new trend. MetLife has been using ROI calculations for the IT portfolio for a considerable amount of time. Bytreating IT as another line of business, IT professionals are constantly looking at ways to increase efficiencies, share best practices and, of course, maintain a strict adherence to ROI.

ROI is not new to the IT industry, but is once again top-of-mind. As all investment decisions are scrutinized ever more closely and as IT has become a key enabler of critical business processes, the business need of establishing a good ROI is more important than ever. I would be surprised if, even as the economy grows stronger, observance of an ROI did not remain an important part of the approval process for any new project.

A: Cecilia Claudio, Farmers Insurance: There is certainly a new-found awareness of the importance of paying attention to capital expenditure as it relates to all investments, not just on IT projects. My own view is that return on investment is neither the solution nor the real problem; attribution is--especially on the benefits side. Using ROI to justify any initiative should always be one of the metrics used in good or bad times, but holding IT and the business accountable for the benefits must be emphasized much more. Many projects do not deliver on the return on investment that was used to "sell" the project, but few organizations take action. This perpetuates the cycle of not putting much value on ROI.

A: George McKinnon, Nationwide Insurance: ROI may appear to be more of a new trend because there has been a greater focus recently on the bottom line. ROI is a great way to measure the value of IT and Nationwide's CEO, Jerry Jurgensen, has recently requested a company-wide ROI evaluation of IT. This will provide one common, standard baseline for ROI. It is a challenge relating ROI in IT projects, because calculating the benefits is not always easy. There are some, usually "credibility," issues around the numbers that are involved with ROI, on both the cost and benefits sides.

A:David Annis, The Hartford: From where I sit, it is not a new trend, although it is interesting to see more being written about ROI. That is probably because the industry has been hit hard and because of the weak economy, and IT leaders are being forced to make tough decisions. At The Hartford, we have always had significant cost-benefit hurdles. Overall, I don't think ROI has become more strict. It has always been part of our processes. However, ROI alone is not sufficient to take a complete measure on a project. The business and IT strategy is highly integrated here. Although ROI plays a part, we also look at how the project will fit into our long-term corporate strategy.

Q: Is ROI different for different types of IT projects? And is there a threshold that allows smaller projects less formal scrutiny?

A: Candito, MetLife: The size of the project should not come into play for approval processes. All projects should undergo the same scrutiny to insure the integrity of the IT portfolio. And if the IT organization is to be treated as a line of business, then it should face the same ROI scrutiny as business-focused projects. However, like any matter in business, and life, there are always exceptions. Every project goes through the same rigorous process and procedure for approval, but there can be mitigating circumstances that allow a project to be approved, though it may not achieve the standard approval levels.

A: McKinnon, Nationwide Insurance: At Nationwide Insurance, there is a distinct threshold for a project to be formally prioritized--$250,000. At this level, the executive leadership team becomes involved in the funding process. Smaller projects are given less-formal scrutiny. Currently, we are refining our funding process for 2003. We are proposing breaking IT initiatives into even smaller projects, so that each component can be better prioritized. Prioritizing projects in smaller, project lifecycle-based funding cycles will lead to defining more exact criteria for ROI.

Q: What methodologies do you use to evaluate and establish IT return on investment? Where do executives usually go wrong in calculating ROI?

A: Candito, MetLife: While all aspects of ROI are taken into account when analyzing projects, the ROI is formulated on the total cost of investment and the risk associated with project delivery and/or benefit realization. MetLife has established a "gold check" process that is jointly completed by IT and the business. The gold check process takes into consideration cost of capital, taxation, benefit delivery, ongoing expenses, risk and several other factors.

A: Claudio, Farmers Insurance: I look at all the financial measures (TCO Total Cost of Ownership, IRR Internal Rate of Return, NPV Net Present Value, ROI) to justify investing on a project, but ultimately I will also put in place the accountability for the success of any initiative. As I said before, this is what is usually missed in the decision-making process. Who is accountable for results?

A: McKinnon, Nationwide Insurance: We utilize three components to evaluate and establish IT ROI: TCO--The comprehensive calculation of project costs, including development, lifecycle, and exit costs; NPV--the value of all expected future cashflows, less the cost of the investment; Discounted Payback Period--the time required for the investment to recoup its cost. Also, there is a tendency to underestimate "soft" benefits as part of the ROI calculation. For example, a "soft" IT benefit is customer retention. Instead of this being a "side" benefit, the advantage of retaining customers, as opposed to trying to get new ones, can be quantified.

Q: With a focus on short-term ROI, do insurers run the danger of overlooking the critical business value of long-term projects?

A:Candito, MetLife: At MetLife, we look at the overall investment in a project--both the initial investment, which would determine the short-term ROI, and the projected investment, which determines the longer-term ROI. Calculating the long-term ROI, combined with the business value of the project, helps us to avoid the dangers of overlooking the critical business value because of a lower short-term ROI versus a higher long-term ROI.

A: Claudio, Farmers Insurance: The short-term view is just a reflection of economic realities, i.e., nobody wants to bet big. Executives are no different from executives in other businesses, but unfortunately for us, we may have hit the confluence in terms of the insurance cycles, poor investment returns, and general economic weakness coming together simultaneously.

A: Annis, The Hartford: I don't think there is an inherent decision to do one or the other. We look at long-term strategy and short-term deliverables. The vast majority of the projects are based on long-term strategy and short-term deliverables focused on our corporate strategy. Our strategy is not annual. The strategy goes over year over year and is always moving in a consistent direction.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio