Archives ||  About Us ||  Advertise ||  Feedback ||  Subscribe-
-
Issue of July 2002 
[an error occurred while processing this directive]
-
  -  
 
 Home > Cover Story
 Print Friendly Page ||  Email this story

REALISING ROI
A take-off on ROI

The 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.

AIR INDIA

Industry: Airlines
Revenue: Rs 52.24 Crore (for 2000-2001)
Employees: 17,185
IT Budget:
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

IT 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 the benefits

Not subtle
The 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 obvious.

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.

Wider consideration
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.

Tools
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 as well.

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.

User help
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' solutions.

Some cases
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 very early.

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.

The perspective
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
To 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 future
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 SPO?

MSV Rao is Director, Information Technology at Air India

 
     
- <Back to Top>-  

Copyright 2001: Indian Express Group (Mumbai, India). All rights reserved throughout the world. This entire site is compiled in Mumbai by The Business Publications Division of the Indian Express Group of Newspapers. Site managed by BPD