Taking the Guesswork Out of Calculating Technology ROI

With budgets being squeezed, the return on investment for IT projects can pay off in the long run.

Back to Basics

Establishing a templated business case outline-one that can be used for a variety of IT projects-is a good place to start in establishing a technology ROI plan for the IT group. ""One of the first things a company should do is standardize the process of putting together a business case justification,"" says Jack Keen, founder and president of The Deciding Factor (TDF, Basking Ridge, NJ), a business case information, tools and consulting provider. ""The business case justification should have a standard set of questions and calculations that are asked of each project.""

At ERC, says Agar, all IT projects are run through a standardized evaluation process. ""ROI is process-driven here,"" Agar says. ""When starting a project, there is a project analysis and a business analysis. All projects are really business transformation projects."" Projects at ERC must have three components before approval: business case approval; approval from the Six Sigma team (Six Sigma is a quality control methodology in place at all GE companies) and approval from the IT team, Agar says.

Farmers Group also has a formal process where each project develops a business case, says Claudio. ""The business case answers questions such as, 'How will the project benefit the business?' 'How will it decrease expenses?' 'How will it position Farmers to be a better competitor?' 'What is the ongoing cost to keep the technology running?"" Claudio says.

At Clarica, all projects are rated against a formal scoring sheet that tabulates key criteria: how the project will impact competitive advantage, drive growth, reduce expenses, increase income, and how long the project will take to bring a ROI. ""We look at the scores, then we look at the budget,"" Van Dyk says. ""We are really looking for a one- to two-year payback.""

However, even with an increased focus on tangible results such as increased efficiency and benefit to the business, intangible results still play a large part in deciding the value of a project.

""Establishing a business case, one with a defined set of metrics, does not leave room for intangibles,"" says TDF's Keen. ""However, senior executives make many decisions based on gut feel."" Many companies that use strict business case methodologies sometimes do not pay enough attention to intangibles, or ""soft metrics,"" Keen adds.

Part of the reason why there is a move towards evaluating more tangible results, says MetaGroup's Johnston, is that soft metrics have sometimes not shown results. ""We went through a period of time where people would say, 'As customer satisfaction increases, so will sales.' And most people would accept that. But now people are questioning it,"" Johnston says. ""By how much will sales increase? And will the increase in sales be enough to justify a large technology investment?""

For instance, Johnston says, companies are measuring exactly how much a shorter sales cycle will impact sales, rather than ""just saying it will impact sales and leave it at that.""

Intangibles Become Tangible

But rather than just picking numbers out of thin air to help justify a business case, many previously intangible considerations are now, in fact, tangible. ""Customer satisfaction surveys are increasing and it is becoming a more valued parameter,"" says John Sardelis, managing director, Jason Consulting, (Great Neck, NY).

At ERC, Agar says that while the company relies on its ROI processes and metrics, it does take into consideration intangibles. ""We constantly monitor the feedback of our customers and we are continually asking our customers about processes on our Web site,"" Agar notes.

The technology decision-making process at Clarica also takes intangibles into account. ""We don't have a specific category that measures intangibles,"" Van Dyk says. ""We score the project and tabulate the scores. If the project scored low in one category, but it will have an impact on customer retention or agent satisfaction, those benefits may sway the decision. We don't draw a line across the page and say everything with a score lower than 'x' won't get approved.""

Delaney Nelson says intangible benefits play a large part in the decision-making process at Minnesota Life. ""We have an internally developed methodology for evaluating IT projects that has been in place for many years,"" she says. ""When it comes to benefits we can't measure, there is no formal process for evaluating the possible value of the benefit. That is where it gets into a judgment area, and we sometimes have to make bets on technologies."" The combination of the internally developed ROI methodology and the educated judgments that the IT executives make are a good combination, according to Delaney Nelson, because ""sometimes you can over measure and ignore other benefits.""

In fact, argues TDF's Keen, ""things such as improving employee morale and improving company image are really not intangible. Keeping customers by improving customer loyalty can be measured,"" by analyzing the number of products a customer has, Keen says.

""With every project that we launch, we try to put in some measure of how it will impact customer satisfaction or retention,"" or even track how many policies a household may have, says Farmer's Claudio. ""If a customer has an auto policy, our goal is to get them to buy a homeowners policy. The softer benefits, the so-called intangibles, do not weigh as much in our decision making, but they are a part of the process,"" adds Claudio.

MetaGroup's Johnston says that household penetration is now becoming more of a tangible goal because of ROI analysis. ""Rather than just saying the company should have 'x' number of policies per household, insurers are attaching goals on new projects and the executives will expect to see an increase in penetration when a new project is eventually launched,"" Johnston says. ""If they don't, they will start to ask questions.""

Actually Reaching ROI

While establishing a business plan that includes ROI metrics for a certain project is a big step towards establishing a goal, many companies fall into the trap of ""following the project"" once the initiative receives approval, rather than sticking to the business plan.

""A common mistake is the business case that was approved is not used as a tracking mechanism,"" says TDF's Keen. ""Using the business case that 'sold' the executives on the merits of a project is great for keeping the project on track so the goals it sets can be met."" Keen suggests that if the project gets off track or it looks like it won't deliver a return, executives can refer to the business case to see where the project ran off course.

However, the business case should be flexible to account for advancements in technology, market changes or shifts in corporate strategy, says MetaGroup's Rubin. ""If the schedule changes or the goals are altered, the business case must be reassessed,"" he says.

""We have regular check points on our projects,"" Minnesota Life's Delaney Nelson says. ""If the user asks us to expand the project or alter it, we tell them what the impact will be,"" in terms of delivery, ROI estimates and cost.

Farmers Group has a very stringent, on-going review of technology projects, Claudio says. ""We have a specific and detailed model for each project"" that establishes goals and ROI estimates, she adds. ""Once we start the project, we have a weekly review. The business case is followed during the meetings. If we don't see the anticipated benefits, we may re-evaluate the project, adjust it, redo the business case, or even cancel the project,"" Claudio says.

By staying on top of projects, technology executives may be able to correct mistakes and save projects from straying too far from the business case and ROI goals. Establishing a track record for successful projects is becoming a vital part of an IT shop's sales tools.

Claudio makes sure ""real business value"" is part of all of the company's IT projects. ""The business side is always more receptive to a project if it has real business value, and shows a possible ROI,"" Claudio says. ""If the project does not have that characteristic, it can be seen as an expense item,"" Claudio adds.

Not only does establishing an ROI estimate make the approval of an IT project more likely, it also establishes a track record for the IT group. ""Establishing metrics and hitting the goals works in two ways,"" Claudio continues. ""It works to show we actually delivered on the commitments we made. It also serves as a 'lesson learned' when things don't go well, so we don't repeat mistakes. But overall, hitting commitments makes our job much easier in the long run. The business knows IT will only pursue projects that add value.""

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

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