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Issue of July 2002 
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REALISING ROI
ROI: Reality or illusion? - Realising ROI

In 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 Data Warehousing.

BLOW PLAST LTD.

Industry: Manufacturing
Revenue: Rs 248 Crore (For 2000-2001)
Employees: 350
IT Budget: Rs 1.25 Crore
IT budget as percentage of revenue: NA

An 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

Investment 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 initiative.

Many 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 ROI exercise.

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.

Understand business
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 relevant technology.

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 and quantitative
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 of benefits.

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
Many 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 promise.

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.

Don't oversell
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 that.

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 to fail.

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 Blowplast Limited

 
     
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