the 70s and 80s IT investments were made to benefit
mechanization in an organization and quantitative benefits
were simple and straightforward. The company could save
manpower, and the savings due to automation justified
the investment. Now that IT has matured in most companies,
there is talk of large-scale investments.
Sometimes benefits are more intangible than tangible.
This happens in situations where an enterprise wants
to overhaul from a smaller system to a larger system,
install large enterprise application software, add connectivity
options, and introduce KM (Knowledge Management) or
Revenue: Rs 248 Crore (For 2000-2001)
IT Budget: Rs 1.25 Crore
IT budget as percentage of revenue: NA
ROI exercise is useful but the figures achieved
are tentative. The
returns may be judged in terms of quantity and
quality. The practice
is a reality or an illusion depending on the way
the IT Head wants to look at it
in technology infrastructure has increased considerably
over the last 10-15 years. Even traditional brick &
mortar companies have adopted IT in a big way. Given
this magnitude of investment, paucity of funds, and
demand from other functional areas for budget allocation
from the same kitty, the IT heads are under increased
pressure to justify investments in terms of benefits
both quantitative and qualitative.
Taken for granted
In the initial phase many companies invested large sums
as the benefits were taken for granted. For example,
investments in connectivity and ERP usually ran into
crore of Rupees, but many companies did not carry out
a detailed exercise to judge the benefits as it was
taken for granted since many renowned organizations
had taken similar initiatives.
However when one tries to put down the benefits, the
process of quantification runs into problems as many
other initiatives are required in conjunction with the
IT Heads believe they have already realized ROI on investments
made on expensive initiatives like ERP, CRM, and SCM.
This is likely because people tend to believe that rolling
out the project is a success by itself and is good for
the organization. They have struggled so hard and put
so much energy to complete the project, they consider
the completion as a payback in itself. This kind of
attitude has made the management lose its faith in the
Many times people confuse benefit with orderliness.
They confuse lack of information with information available
at the right time, to the right people, and the right
place. They forget the benefit planned at the start
of the project.
The IT Head must understand the business nuances thoroughly
and think in terms of the business perspective. He/she
must know the issues the company is facing and be clear
that the IT initiatives meet the business challenges
both today and tomorrow.
To understand the business case clearly, the IT Head
should ascertain the exact requirements that the IT
initiative has to address and make a list of the business
areas that are likely to benefit. 'Synergy' is the mantra
that needs to be achieved between IT and business strategy.
If your business case is not clear then the IT strategy
can't be clear.
The IT Head needs to play the role of an internal consultant.
He can go a step further and identify a business problem.
Based on deeper understanding of the business, the IT
Head can along with the functional heads isolate the
problem. He can then create a solution based on the
IT core to business
In telecoms, banking and other service industries IT
investment is the backbone of the business. In such
cases the robustness and the comprehensiveness of the
solution is more important than quantification of the
benefits. For example a CRM package for a mobile telecom
service provider is evaluated on features and whether
it helps to understand the customer profile and usage,
because such a study ultimately leads to more revenue.
In such a case the solution lends a competitive edge
and is given priority. IT investments in such industries
is derived from the business model and benefits are
in terms of survival.
Qualitative benefits are to be deliberated and proven.
It is essential to list qualitative benefits in detail
as the listing exercise will throw light on other initiatives
required to achieve the desired objective. It also helps
to measure the success of the initiative and the quantification
It's a good idea to forecast a few likely scenarios
and follow the scenario that is having the highest probability
rather than taking the one with maximum benefits. You
can measure the benefits up to six years and incorporate
NPV (Net Present Value) calculations and tax benefits.
IT as an enabler
We all know that an IT initiative in isolation will
always fail unless backed by improvements made concurrently
in the organizational processes. In view of this the
costs involved in changing the interlinked processes
should be included as a part of the total project cost.
We should avoid the temptation of overselling the IT
initiative by showing lower costs and higher benefits
as it will result in the management losing faith in
the IT department due to unplanned investment and efforts
at a later stage.
Rigor in figures
IT Heads short circuit the process under the guise of
paucity of time and try to justify by claiming that
the returns are very subjective and can't be put on
paper as figures. But when you put figures, it makes
your thought process more logical and sharper. I somehow
feel that if there's pressure on
a person to justify the kind of efforts or initiatives
taken, the decision will take a different color. The
person will feel that he/she has made a promise to move
the company up the development matrix, and must keep
The IT Head can put quantifiable benefits by taking
key persons in confidence. It's always a good idea to
involve heads of other operational departments. Create
a core team that comprises the heads of departments
like Manufacturing, Marketing, Finance, and HR. Ask
these heads to detail their business needs and make
a joint presentation. Create a solution statement that
addresses the problems and run it through your core
team for improvement areas.
Now when it's time to present the budget to the senior
management, all these departmental heads are convinced
that your solution will work and are on your side. Your
only job is to convince a few people in the senior management.
This makes the task of justifying the ROI on IT to the
senior management much easier.
In reality, overselling the benefits of a project is
a bad idea as you can land up with negative ROI. If
you can actually break even a project within four years
then it is a good return. This is because the investment
will become obsolete at any point in time later than
It's a good idea to ensure that the business processes
are well organized from the beginning. If the business
process is confusing and disorganized, and you try to
implement IT infrastructure on top of it, it is destined
A project with low ROI and high investment can make
the IT Head search for a better option to achieve the
desired objective. Alternatively, IT Head can work out
a balance so that the result offers marginally lesser
benefits with a considerable lesser investment.
To sum it up
To sum it up, an ROI exercise is useful provided the
IT Head believes in the process in spite of the fact
that the figures are tentative. The benefits considered
for ROI may be an illusion or perhaps reality depending
on how you want to look at it as it is much more than
putting some figures and getting the project approved.
It will also depend on the amount and sincerity of effort
an IT Head and other functions are willing to put.
Gobind Lulla is VP, Systems at