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From: www.itworld.com
Measuring ROI in an e-business economy
April 26, 2001 —
"At the end of the day, it's all about the bottom line."
Sound familiar? Though trite, this expression underscores one of the factors essential to e-business or, for that matter, any kind of business. As the economy continues to pound tech stocks, executives continue to remind themselves that the bottom line -- cash inflow versus cash outflow -- is what measures the success or failure of their business.
That's why executives are putting increased pressure on their IT departments to calculate the ROI of both new and existing technology ventures. While IT employees often complain that ROI doesn't measure the real value of technology, techies must also understand that it's ultimately the company's larger business goals that dictate whether a technology project will survive or perish.
So how does one measure the ROI of technology in an e-business economy?
In traditional IT, ROI means "cost savings," calculated as total savings and/or return divided by total cost. The difficulty, of course, comes in determining and quantifying each factor. Sure, managers can measure software investments in dollars and estimate manpower by calculating the hourly cost of each individual. But that misses the point. How do you factor in such variables as technological innovation, building a competitive edge through technology, business process automation, and online strategies?
While the final ROI equation remains the same as in traditional IT, e-business has introduced a whole new set of variables. Breaking down each factor into quantifiable pieces is simply a matter of understanding and developing a method for calculating them. By determining the savings, returns, and costs of each variable, managers can easily calculate the total ROI.
Fortunately, an increasing number of methodologies are being designed to help managers measure the intangibles of IT and recast them in a financial light. These various methodologies create quantifiable models for those ugly but essential business concepts such as market climate, strategy alignment, staff flexibility, and customer satisfaction.
The last, and often overlooked, step in measuring ROI is thinking about how to increase ROI. That's where technology comes in. The economic goal of every market is optimal efficiency, and technology is the principal agent for efficiency gains. So why not use it?
Calculating ROI:
Demystifying ROI: ROI provides a core foundation for calculating the benefit of management software. In its broadest sense, it works according to a simple formula: Add "savings" and "derived income," and divide the sum by "investment."
Demystifying ROI, Part 2: Meaningful ROI analysis requires you to look closely at your processes, costs, and tool set.
ROI in e-business:
How to measure the real value of your e-business ventures: E-business has modified IT's traditional metrics system. But the bottom line is the same: Measures must be simple, meaningful, quantifiable, and auditable.
Methodologies:
Value made visible: A whole school of valuation methodologies has cropped up to try to nail down intangibles, make a real and measurable link between technology and strategy, and define and quantify risk in a meaningful way. This article winnows out a few of the more established approaches.
Economic value added: A better measure of finances?: Economic value added (EVA) measures a corporation's true economic profit. The objective of EVA is to understand which business units best leverage their assets to generate returns and maximize shareholder value.
Increasing IT's ROI:
Minimizing the impact of downtime: By calculating losses accrued during a Website's downtime, IT managers can plan prevention strategies that will affect ROI in areas from e-commerce to outsourcing.
Automating internal workflow drives good e-business: Streamlining operations makes automating in-house business processes a must for companies looking to increase technology's ROI.
Other articles of interest:
IDC e-business trends: Closing in on profits
How do I measure ROI for my e-business?
Gaining confidence in using return on investment and earned value
ITworld.com