executives are constantly evaluating the cost versus
benefit of different business decisions. Understanding
and quantifying each option's costs and benefits is
necessary to make an informed decision. When assessing
projects, the most commonly accepted financial measure
is the calculation of the ROI.
Measuring ROI on technology investments has always been
a favorite activity among organizations. Lot of effort
is taken in trying to quantify the returns in terms
of revenue growth and cost reduction resulting from
investments in technology. But it's not possible to
calculate the ROI on IT investment very precisely because
at times businesses are not able to define quantitatively,
the importance of high availability, redundancy, and
reliability of technology infrastructure. Many CFOs
find the loose relation between technology investments
and returns very discomforting.
Banking & Finance
Revenue: Rs 509.31 Crore (Interest earned
IT Budget: Rs 20.71 Crore
IT budget as percentage of revenue:
the process of calculating ROI on technology investment
is important, it depends on a mixed bag of situations
and conditions. But it's not possible to calculate
the ROI very precisely because quantitative benefits
don't figure very well on paper
certainly very pertinent to calculate ROI in the financial
industry. Costs have to be controlled and at the same
time investments need to be made where the 'bang for
the buck' is maximum. There are always areas where the
ROI may not be very high but other non-quantifiable
factors may exist which may tilt
the choice in favor of those investments.
In the area of IT, working out a precise ROI can be
a tricky affair. This is mostly because the returns
may not always be immediate. The situation becomes even
more complex because the distinction between technology
and business is fast disappearing. And let us not forget
that many technology investments fail to deliver expected
returns not because of technology failures but because
of poor process
design and inadequate user training.
A MIXED BAG
There is no fixed set of tools that one can use when
it comes to justifying IT investment. This statement
can be better understood by looking at the following
examples which represent a variety of technology investment
scenarios where the investments are justified:
A new set of equipment has been procured and has replaced
the old. The new equipment may have been purchased
at a high cost and has an expensive AMC (Annual Maintenance
Contract). This results in lower running expenses
and the new investment pays for itself in a given
A company has invested in IP Phones and has set up
a dedicated VoIP network across its offices. This
investment allows the company to save costs by using
bandwidth capacities instead
of using the services of external entities.
A company makes investments which aim to exploit new
technologies to give itself a first-mover advantage.
In this case, quantifiable returns may not be possible,
but the clear benefit is that the company is able
to enjoy a marketing and publicity edge over its competitors.
Most banks have stepped up on efforts to increase
its ATM network. Although this needs a rather large
investment, the cost is justified when you look at
competition. Other banks will offer a larger network
and if one bank doesn't do the same, it loses business.
In this case the investment is justified due to competitive
A company invests finances to set up a helpdesk infrastructure.
This kind of IT investment brings about qualitative
improvements in the services being offered by the
IT department to its customers (various users in the
organization). These improvements are very difficult
to quantify in monetary terms.
The IT department recommends an investment of a certain
amount that promises to increase the efficiency and
performance of the network from X to Y percent. In
this case, the increase in network uptime is very
clearly understood and defined but often the business
will not be able to put a quantitative benefit that
arises out of this increased uptime.
A company considers investing in a new CRM application.
Typically, the expected benefits from such investments
are framed in terms of improved customer satisfaction
leading to increased retention and/or use of a company's
products and services, and an improved ability to
target customer needs. However, the implementation
of a new system is only one element. Having perfect
customer information without adequately trained customer
service representatives to interpret and act upon
that information or having the insights derived from
one's CRM system but not providing these insights
to one's sales force or product development organization
prevents ROI from getting maximized.
It is evident from the above situations that it is not
always possible to work out ROI on IT investment in
a precise form. One measure of appropriateness of technology
investment may come from a comparative study that looks
at what other companies of similar size have achieved
with their IT investment. But such data may not always
be available and will invariably be outdated even if
The practice of calculating
By calculating and observing ROTI (Return on Technology
Investment) over a period of a few years, one can aim
to achieve a better level of IT investment management.
And it also helps the IT Department achieve a certain
level of transparency that may lead the top management
in placing more faith in it.
Unfortunately, the practice of calculating ROTI was
not followed as a serious discipline in most organizations
until very recently. It is only over the last couple
of years or so, that business units in Indian organizations
have started demanding justification for investment
in technology. This has forced technology departments
to be more transparent in the way they make their decisions.
Today, technology departments are required to justify
their investments and as far as possible account for
the tangible benefits that can be derived out of that
investment. At the same time, the CEOs and Business
Heads are much more tech-savvy than in the past.
They also have much better appreciation
of technology processes than before.
Steps for ROTI
IT investment in a company can take place in various
forms and situations. Some of these situations have
been discussed earlier in this article. The benefits
in some of the situations are obvious and easily measurable,
and in some, very difficult to ascertain. It is the
responsibility of the IT Heads to examine wherever possible,
whether companies can use any appropriate metrics to
Such an exercise will invariably require interaction
with business units to translate specific benefits into
quantifiable measures. Many consulting firms have evolved
relevant templates that can help companies measure ROTI
in key areas of IT spend. Using such templates as a
basis to calculate ROTI, a company can find an appropriate
solution metric for itself.
WHOSE BABY IS IT?
Very often the responsibility of ROTI calculation is
left to technology departments alone. Calculation of
ROTI should be a joint responsibility of the finance
department, technology department, and related business
units. Also, at times there is a tendency to achieve
perfection which, should be avoided. It is best to follow
the 80:20 principle so that key technology investment
benefits are captured much earlier, before a precise
model can emerge.
Calculation of ROTI becomes easier if:
Technology, business units, and finance units work
cohesively on the activity.
One makes an attempt to derive benefit from similar
work done in other organizations.
In case, in-house expertise is not available, it makes
sense to engage services of a consulting organization
and incorporate best practices from them.
Not all areas of technology investment are amenable
to ROTI computation. Investment in R&D, new technologies,
and improvement in service levels are generally the
areas where precise calculation of ROTI is not possible.
While looking at return on technology investment one
should keep these facts in mind and set the expectations
appropriately. There is a need to approach ROI in a
holistic fashion, incorporating people, processes, and
technology and then attempting quantification of returns
pertaining to the utility of products and services one
offers. So, total expected returns may be a better option
to look at than just the
Neeraj B. Bhai is CTO at IDBI Bank