August 28, 2008, 3:20 PM — In the world of IT, ROI is king. But should it be? How many approved IT projects have you seen with projected returns that -- in spite of the vetted calculations -- you just didn't believe? And how many projects that were rejected because ROI couldn't be calculated or proved, would have turned your company into a well-oiled machine? ROI can be a great tool, but it's not the only mechanism for judging value.
Let's look at some situations that arise when managing information technology and see how well ROI works in each instance.
The Broad View of IT Value
- The company sets its business objectives (e.g., expand business to two new continents).
- IT sets its own objectives consistent with its mission and with the business objectives (e.g., increase international usability of applications).
- IT designs its projects and services with the intent of achieving its objectives (e.g., three proposed projects for language extension, geographic address localization, and mapping).
- The outcome is changed operations and the concomitant benefits.
- The changed operations drive achievement of the business objectives and the IT objectives.
"Information Technology" -- both the technology itself and the department or team organized to apply it -- is a means to achieve business objectives. Its value is derived from how well it achieves this objective. (Figure 1 illustrates how IT value is achieved.)
Achieving business objectives is a long-term matter if they’ve been set appropriately, and continuous progress towards the objectives often takes the cumulative effect of many projects.
Where is ROI in this picture? If it exists at all, it’s in a project. (It may not exist for some projects, such as foundation infrastructure or technology platform work, for example).
So what's the value of IT? It's in the achievement of its financial and customer benefit objectives (increased usability and use in foreign countries, in this example), and it's in the indirect achievement of the business objectives (increased international revenue). It's not in the ROI calculation of any one project (extend applications to Spanish)
ROI may be illustrative, but it's not a measure of IT value.
Making Project Choices
There are always more projects than there is budget flexibility, so how does an organization choose? The snap answer is 'pick the projects with the highest ROI for the money' -- but not so fast. Would you choose to build and support what you thought was a killer iPhone application, potentially a lucrative business, if your company offers only outsourced support services? Probably not. Would you choose a project, all other things being equal, if another project delivered results faster? Probably not. Would you choose a project, all other things being equal, if another project could drive achievement of two strategic objectives, not one? Again, probably not.
On the other hand, would you settle on a project that had no ROI but allowed you to pass your Sarbanes Oxley audit? Would you pick a project that yielded no new revenue, but prevented erosion of revenue from a competitor? Would you pick a business-continuity project if no such plans were in place, even though you may never get any benefit from it? Probably yes for all, because the business impact is potentially significant.
Good governance suggests that there be a sensible, understood, and predictable scheme for choosing projects. This requires a scoring scheme agreed to by all who have a say in IT's work. The scheme can have any number of factors -- ROI/impact, number of objective served, time to impact, etc. Pick your factors and the weighting of each. Certainly ROI fits into the scoring scheme, but it’s not the only factor.
Judging Project ROI
One way to balance your portfolio of projects and services is to classify them by whether they’re about running the business, transforming the business, or growing the business. The ROI calculations are different, and among them, have differing levels of credibility.
Running the business includes all IT activities that support day-to-day operations of the business and all IT improvements that don't fit into the other two categories.
