is a straightforward concept which is widely known and
used to estimate the gains in terms of profits or cost
savings that accrue from a capital IT investment. When
we use this term
in the commercial world particularly
in the context of IT, we
often, though wrongly mean return from financial investment.
In almost all IT projects in addition to the financial
investment, there is also investment in terms of time
and efforts. Besides the financial returns, often we
seek returns in terms of ease-of-use, time savings,
speed, accuracy, and deeper analysis.
Petroleum Corporation Limited
Oil and Natural Gas
Revenue: Rs 50,000 Crore
IT Budget: NA
IT budget as percentage of revenue: NA
are a myriad of mathematical models like NPV and
IRR to calculate returns but they may not give
you a true picture of ROI. In cases like ERP,
SCM, and CRM projects ROI is an elusive element.
IT Managers can supplement analytical studies
with experience and gut feeling to sniff out a
good project that can fetch good returns
Most of these costs and benefits are not quantifiable
in financial terms. For these reasons, ROI in just financial
terms (IRR, NPV, Payback Period, and Discounted Payback
Period) does not do justice with IT projects and does
not make much sense as single evaluation criterion.
Moreover, we must also remember that for calculating
the financial ROI one has to make cash-flow projections
into the future, which may be easy in industries where
the degree of uncertainty is low, but is extremely difficult
if not impossible in the IT industry where the degree
of uncertainty is high. The boom and decline of dotcoms
is a prime example of high uncertainty. Everyone understands
that in IT it is very difficult to make future estimates
and consequently it is hazardous (often fatal) to follow
conventional analytical methods. Quite often we need
to justify projects using means other than pure financial
By highlighting the problems and difficulties with financial
ROI methods and their inherent inadequacies I do not
mean that evaluation of IT projects shouldn't be done
at all. Evaluation is necessary to judge how often investment
in an IT project meets our expectations. For evaluating
IT projects we need to look at where and how much one
should invest and what 'returns' to expect from that
While evaluating these projects some of the very important
aspects to be kept in mind are changes in the decision
process, changes in a managers concept of decision,
and the situation and procedures that have to be implemented
to make the project successful. All IT managers, even
those who have not gone through the process of implementing
an ERP project, are aware of these issues and consider
them in their analysis.
Other than financial techniques there are other methods
that can be used to evaluate IT projects. They are Strategic
Match Analysis, Value Chain Assessment, Relative Competitive
Performance, Management Vision, User Attitude and Utility
Assessment, Return on Management, Competitive Analysis,
and Management Assessment of Systems Value.
The method you select to judge a project depends on
number of factors like the project objectives, decision
situation (certainty, risk, incomplete information,
uncertainty, and conflict), strategy, structure, planning
process, control systems of the organization, and other
projects being considered or being implemented. Strategic
Match Analysis, Management Vision, and Competitive Analysis
are three of
the most widely used non-financial techniques for evaluating
Strategic Match Analysis is the study of the extent
to which technology investment is in line with the overall
business and corporate strategy.
There are certain projects which do not necessarily
provide monetary returns but if you don't implement
them, you lose business and may even have to eventually
wind up. In these cases the extent to which the project
objective/benefits (including intangible ones) match
the business strategy, offers justification of the project.
ROI isn't every thing
A financial ROI study may tell you about the monetary
returns you are likely to receive, but may not highlight
the criticality of the project. Any bank which says
will not install ATMs (Automated Teller Machines) because
it may not earn money through it will surely lose business.
In such cases a simple
financial ROI study may not
reflect that if ATMs are not
installed, the bank will lose customers.
A prime real-life example would be the Indian Railways
(I had worked with the Indian Railways earlier). The
railways use a computerized reservation system. Since
computerization, the number of reservation assistants/clerks
employed has increased. Cost data indicates that after
computerization the cost of printing a journey ticket
is more that the cost of doing it manually. But I am
sure that everyone will agree that the benefits computerization
has produced are enormous compared to this direct increase
Earlier, with lesser staff there would be long queues
who had to wait for several hours. Today, a person does
not have to stand in queue for
more than 30 minutes or so.
The amount of man-hours that the
railways save every year is astronomical.
This huge benefit can't be calculated as financial ROI
figures for the company. If the railways didn't computerize
it would have lost revenue and deprived passengers of
comfort. Such projects are often justified using Social
CFOs (Chief Finance Officers) sometimes are reluctant
to pass the IT budget because they feel that the returns
are not large enough
and don't come soon enough. During a pure financial
project appraisal one has to understand and accept that
any return which can't be put down in figures on a sheet
is often judged as 'zero return'.
So the non-financial benefits are taken in to account
in such analysis at zero value only. Such an analysis
is obviously wrong and projects like the one above cannot
be justified in this manner. We have to look at the
methods discussed above to justify the projects.
Even though the economy is slow it should not be a deterrent
companies to look for opportunities
in IT infrastructure. In a bid to protect finances one
shouldn't sacrifice newer avenues to gain value. ROI,
in some cases is not always the best way to evaluate
an IT project.
Ultimately you have leave it to the sixth sense of the
'pilot and his team' (corporate leadership) to 'sniff'
out good projects from the mass of the projects put
up for approval. Often history alone decides whether
the idea/project was 'novel' or a 'blind spot'.
We should analyze situations, examine technology and
develop options; work on the options and prepare projects,
evaluate these projects using more than one method discussed
above. If the situation still remains unclear one can
even go by sheer 'gut' feeling. But certainly do not
just 'toss a coin' to take the final decision.
Harsh Kumar is Advisor - IT at
Hindustan Petroleum Corporation Limited