airline industry depends so heavily on IT that ROI in
IT-related expenditure is almost taken for granted in
a large number of projects. IT does not play a simple
supportive role in the airline industry anymore. It
has crossed the line of being an enabling tool and has
interwoven with the business processes. So, finding
out the ROI may not be relevant for certain well-established
infrastructure systems. For example, an airline will
not consider finding out the ROI for expenditure related
to the airline ticket reservations systems. The use
of IT for such a function is a foregone way of doing
business. Airlines now use dependable and well-used
models to choose between the decision to use its own
hosted systems and to use systems of other carriers
or service providers to run similar applications.
Revenue: Rs 52.24 Crore (for 2000-2001)
Rs 31.45 Crore (Capital IT Budget for 2002-2003)
Rs 62 Crore (Revenue IT Budget for 2002-2003)
Rs.93.45 Crore (Total IT Budget for 2002-2003)
IT budget as percentage of revenue: 1.79 percent
has crossed the line of being an enabling tool
and has interwoven with business processes to
become a part of an airline's life. In such a
situation, it's a difficult challenge to measure
ROI on IT expenditure. Help from user departments
and some basic tools can help the management realize
benefits of IT in an airline environment are not subtle
anymore. Airlines use so much of IT in its daily operations
that IT has become a part of its existence. And airline
companies may not be actually documenting, more so in
quantitative forms, the role played by IT in assisting
its operations. ROI or no ROI, airlines need IT to run
their business. In such an environment where IT is an
integral part of the business process, it is a difficult
challenge to measure and manage IT benefits.
Moreover, the share of IT spend on an airline's total
revenue is between 1 and 4 percent. This is a rather
low figure and can therefore successfully pass through
the auditing eyes of a financial analyst. In short,
airlines seem to assume that IT benefits are glaringly
Certain decision support systems like yield management,
fuel management, and crew scheduling, have been more
amenable for using ROI for justifying the high investment
involved. The industry has been using familiar financial
reasoning like savings in expenditure and increases
in revenue as benchmarks to evaluate ROI on such investments.
Even in cases where such mathematical calculations are
not very satisfactory, airline managers can't fail to
see the inherent benefits of such investments.
The Internet revolution and the later dotcom explosion
brought its own new dimensions to management. Similar
to dotcom ventures, airline websites tried to measure
e-commerce effectiveness through clicks and eyeball
counts. The lessons the industry learnt from the dotcom
bubble burst were perhaps equally relevant to evaluation
of e-commerce effectiveness for airlines. ROI had to
be given a much wider consideration beyond just visits
to website or even just online sales.
However, airlines' IT initiatives have to necessarily
dovetail to what their customers, namely, passengers
want. When one finds passengers (even some leisure travelers)
rushing through airports flashing cell phones in their
hands, the airlines were quick to spot the opportunity
in WAP-enabled services that ranged from flight information
to frequent flyer mileages. In order to invest in such
futuristic projects, airlines' definitely needed to
find out the ROI since, the investments are high, and
the obsolescence factor is quite strong.
No investment can be made without knowing what it contributes
to the bottom line. Hence, the importance of finding
out the ROI for investments in IT.
A basic tool generally used is benchmarking. The airline
business is so highly prototyped that airlines not only
fly the same aircrafts between same destinations but
just follow each other to do better in the competition.
This kind of 'copying' logically extends to IT systems
We all tend to implement systems in those functional
areas where evidence of usefulness is established. Once
the application area is identified, the exact nature
of IT implementation is decided by means of appropriate
cost benefit analysis. Sometimes, it is possible to
actually estimate elements like cost savings in terms
of reduction in the need of additional manpower and
the increase in productivity of existing manpower. And
there are cases where benefits are so overwhelming that
ROI is simply assumed.
In case of specific application areas like decision
support systems, attempts have been made to ascertain
from the user departments if they can forecast any increase
in sales. Considering a very small value of such estimated
increase, the time period during which the cost of investment
can be recovered is estimated.
Sometimes, users may want to modify the IT systems based
on experience with other airlines. In such a case, the
user department and IT department jointly assess the
costs and benefits and try to choose appropriate technology
alternatives not necessarily following the other airlines'
There are situations where infrastructure projects like
an intranet are implemented to ensure that the organization
works in a modern environment. The benefits of such
initiatives will definitely accrue in the long term.
Then there are cases where IT initiatives were implemented
using only internal resources. In such cases, the justification
was much simpler as there was no additional investment.
Air India's revenue management system and the Web-based
booking engine are good examples of ROI being established
There are cases where the RONI (Result of Not Investing)
needs to be looked at. For example, the result of not
providing redundancies in communication links and such
other IT components. Similarly, disaster recovery systems
may not easily allow one to show an ROI but this is
a necessary insurance.
In my case
Airlines consider IT as a dire necessity for the business
operations. As such, there is not much effort required
in convincing the management about the need for investments.
At the macro level, Air India's investment has been
between 1.7 and 2 percent, which is considerably less
than those of major airlines. However, in each investment
area, a full cost benefit analysis has been made which
details the costs incurred and benefits accrued.
There is quite a high-level of transparency for investments
in our IT projects. A high-level standing committee
regularly meets to discuss all computerization projects
of the commercial department. The commercial department's
projects are the most critical for the airline. Even
other projects have to either go through rigorous scrutiny
at the top management level or at the Board level depending
on the importance and complexity of the project. Over
the years, the value addition that IT has brought to
the business processes has been well identified and
established. The top management has definite faith in
the axiom that IT is necessary and money spent on IT
is well spent, of course after a proper cost benefit
analysis and justification.
For a company to have an unquestionable confidence in
the IT process and also to find out (I have been consciously
avoiding the word `calculate') the real ROI on IT investments,
it is very important to ensure proper IT governance
in the enterprise. The IT goals have to be perfectly
aligned with the enterprise goals. After all, the real
value of using IT in any business process is to improve
reliability, reduce time and costs. IT also is expected
to help reduce investments, lessen the distribution
efforts, and help decision-making. Therefore, only by
aligning the IT goals with business goals, one can see
IT costs in the proper perspective.
With the proliferation of PCs and other allied equipment
all over the enterprise, applications get developed
in a heterogeneous fashion with no uniform standards
and controls. There is an absolute need to adopt concepts
such as CobiT (Control Objectives for Information and
Related Technologies) at the different phases of planning,
acquisition, delivery and operation. In view of the
increasing role of computerization in modern enterprise
operations, the corporate governance of the enterprise
depends quite significantly on the IT governance.
To begin ROI
start with, the IT head should make a complete inventory
of all its assets like hardware, software, and telecom.
He should implement strict procedures to document not
only programs but also processes, implement a change
control mechanism, and update the data on the resources
as often as required. Large installations require careful
capacity planning. Particularly when the backend systems
have to satisfy Internet-based transactions, it is possible
that when the capacity-increase requirements will crop
up suddenly and offer less scope for planning. In short,
an enterprise should institute a well coordinated IT
governance to help the management make good investment
decisions on IT.
Many times, we tend to take only the cost of the hardware
or software as the investment. One has to consider the
TCO as well. It is also necessary to consider the purchasing
cost as well as the operating cost. Sometimes, it may
be difficult to estimate components such as license
fees particularly when vendors change not only the prices
but also the pricing mechanism in captive markets.
One has to take a holistic view to ascertain and apportion
IT resources to different requirements. In other words,
IT services need to be deployed in an optimal fashion.
A judicious mix of in-house efforts and outsourced efforts
can be a helpful strategy.
In the future there is a need to establish more accurate
and real-time assessments of results of business operations
involving optimization of service processes. Such an
approach will help measure ROI of the internal IT investments.
It is said that an SPO (Service Process Optimization)
application will help to measure the ROI of an IT department
with certain accuracy and efficiency in cases where
specific work-flow based metrics can be developed.
SPO is defined by Gartner Dataquest as software designed
to track and allocate the major resources of externally
focused service companies or internally focused service
departments: people, intellectual capital and time.
Hopefully, it will fill in the requirements. It sounds
great, but now how will you calculate ROI for the
MSV Rao is Director, Information Technology at Air India