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Issue of July 2002 
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REALISING ROI
Putting structure to processes

Mani B. Mulki

In this age of decelerated growth and sluggish economy, any expenditure is bound to be carefully screened before getting the go-ahead from the higher management. The scene now is a stark contrast to that of a few years ago during the peak of the dotcom craze. In those days investment in IT was deemed necessary for survival.

The dotcom bust coupled with the rough patch the economy is going through makes it imperative to justify the IT investment to the senior management. No management will ever agree to go ahead with an IT project unless it is convinced that the expenditure will either result in a top-line growth or achieve a higher degree of efficiency in operations. This is especially true in an 'economic value driven' company like Godrej, where unlocking shareholders value and enriching them is a key focus area.

Godrej Industries Ltd. and Godrej Consumer Product Ltd.

Industry: FMCG
Revenue: Rs 1000 Crore (approx.)
Employees: 2,500 (approx.)
IT Budget: Rs 6 Crore
IT budget as percentage of revenue: NA

Calculating ROI is an inevitable function in today's sluggish and low-growth business environment. But there isn't any structured tool to calculate ROI. A cautious approach before deploying an IT project and awareness of common mistakes will put some structure in the ROI process

Emphatically speaking
What then could be a means to calculate the ROI on IT investments? Is there any structured tool that can be used universally to reflect an accurate ROI? The answer to this is an emphatic 'NO'.

Other than the lack of a structured tool, what makes the task more difficult is the fact that a significant quantum of the benefits is intangible in nature and thus difficult to measure. A typical example is a Data Warehousing solution which is set to benefit an organization in terms of a greater depth in analysis of business information. The effectiveness of such an implementation by-and-large depends on the creative level of usage of warehousing tools. Will deployment of the warehousing tools translate into better and quicker decision making capabilities, will it allow higher forecasting accuracy, and can you devise better marketing campaigns? And if yes, how much value can you attach to it?

It will always be possible to ascertain to a fairly high degree of accuracy as far as the tangible benefits are concerned. For example, in a supply chain type of a project the biggest tangible benefit would be reduction in inventory in the chain. And it is possible to lay a judgement on what could be the reduction in inventory of different segments in the supply chain.

Introducing efficiency
One can look at the operational efficiencies that an IT project will bring about. It may be possible to eliminate manually prepared reports, shorten the time taken to aggregate data, generate various MIS, and eliminate redundant workflow.

Consider a company that installs a plant maintenance package. This can result in much lower downtime at the shop floor level leading to reduction in the 'opportunity loss' in sales, and thereby increase in profits. This will then be the potential ROI for the package. Therefore, the methodology to be adopted for calculating ROI on IT investment will vary from one organization to another and from one project to another.

Pre-requisites
It has now become critical to present a proper business case to the management to win their confidence in a new IT project. One should never get into the habit of over-pushing or over-emphasizing the benefits of a project. It is important for the IT department to be fully aware of two things as pre-requisites before embarking upon an IT project. First, complete knowledge about the organization like the business drivers, important workflows, bottlenecks, and growth plans. Second, thorough know-how about the product. It will be impossible to prepare a convincing ROI on the expenditure unless one is armed with the above pre-requisites.

One should then try and see how to marry the product to the organization without the risk of a divorce. It is not necessary that the success story of an IT product in an organization can be extrapolated universally. Each organization is saddled with its own culture and business workflow.

Many companies assume that its business has to operate in a fixed manner in order to generate positive ROI. There is a chance that an IT project in such a company will call for an overhaul of some of the critical workflow processes. In such a case, the organization may not be ready or mature enough to accept the processes.

The IT department should clearly highlight the organization's business drivers that will have positive impact as a result of the project implementation. It will be impossible to garner top management interest and commitment unless this is clearly spelt out. The top management's push and drive is a must in any major IT implementation. Without their support it will not be possible to bring about any process re-engineering in business operations, a function which is essential in the implementation. The IT department should also highlight the time commitments required from all quarters. One should never commence any implementation without getting a commitment from the management in terms of time and resources.

It is also important to find a business sponsor for the project who will 'champion the cause' and be responsible for its implementation. IT should facilitate and enable the implementation and the ownership should lie with the business. The management should be involved in all stages of the implementation. They should be involved during conceptualization, product evaluation and selection, project and resource planning, implementation, and subsequently for support. Only then can one hope to write a success story about an IT project implementation and enjoy a positive ROI in the process.

Common mistakes
One of the most common mistakes made by the IT department is that it builds the project to be 'IT-driven' rather than 'business-driven'. Most IT projects fail because the top management gets a blurred vision of the business drivers likely to be impacted as a result of the implementation. The benefits are often bloated because the IT department somehow wants to push the project through in order to get its hands on latest technology.

One should never adopt a technology just because it is there. Rather, one should consider a deliberate view and go for it only after receiving a firm conviction from all quarters. Another mistake would be to play into the hands of vendors who usually try their best to present successful case studies of other companies and build a huge hype around them.

No ivory tower this
In summary it would be important not to treat the IT department as an 'Ivory Tower' separate from all other functions. It should merge seamlessly with business as an important part. Technology should not be looked upon as 'rocket science', but rather as a tool that will help the organization meet its business objectives and goals. Only then one can find support and hope to implement an IT project and be sure of its success and returns.

Mani B. Mulki is General Manager, Information Systems,at Godrej Industries Limited and Godrej Consumer Products Limited

 
     
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