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Issue of July 2002 
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REALISING ROI
Steering ROI in the right direction
Ashirwad Tillu

Calculating ROI on IT investment is certainly a good practice for Indian companies to follow. However the scenario in Indian companies is different from that of companies in the west. In western countries, among large and medium companies, the personnel across all departments are usually organized and able to handle quantitative data. This makes them well prepared to carry out the exercises needed to calculate ROI on IT.

There is a lot of statistical data generated from different areas and one can put the pieces together to create a picture. In such a scenario, managers find it easy to receive ROI figures based on statistical data available from various resources. Such a level of professional skill is yet to be achieved by many Indian companies.

Mahindra British Telecom

Industry: Software Consultancy
Revenue: Rs 544.3 Crore
Employees: 2,500
IT Budget: NA
IT budget as percentage of revenue: NA

In the current state of economy every investment has to pass through a financial 'gate' which allows only justifiable investments to pass unhindered. A smart IT Head will think ahead and figure out means to justify the essential IT projects so necessary for the organization

Pass the 'gate'
Due to the global downturn, companies across the world have become more cost-conscious. India is no exception. The financial heads and the investor community are definitely interested to see that the company survives the turmoil. And the companies are only too happy to sail through the rough weather by cutting costs wherever possible. They don't necessarily want to hop and leap through the slump, but want to conserve as many resources as possible.

To do this, the company now has to fulfill the criteria that will steer its new IT project through the finance 'gate'. The pressure from the investors and the market has translated to the corporate governance of a company. And since this finance 'gate' has become so important, the company has to look for cost-effective ways to work. This ultimately means that the IT Head will also have to pass through this tightened financial 'gate'.

A formal process
An IT head should use a formal process before making a decision to implement a project. He should list the business requirements, look at the essential areas that need computerization, and study the growth drivers for that particular area. If the area is critical to the core business, it can be categorized as the highest priority. If the IT initiative will only enhance the value of a project, it can be categorized as low priority. In case of low priority projects, it's difficult to justify ROI.

A good approach is to work out how the solution will evolve. You can break down the need and the solutions into pieces or modules, and lay down the specifications for each part. The last part of the project is to attach a quantity to the benefits. The quantity can be measured by adding the cost and the intangible returns.

Reverse pressure
Usually the IT Head has to put pressure on the senior management in order to convince them about the need to implement an IT project. The IT Head has to make reports, justify costs, and produce strict deadlines for completion of the project. Even after promising so much, the senior management may be reluctant in the wake of rising costs and reduced profits. But consider a scenario where the pressure is or can be reversed.

The shareholders of a large bank feel that it's vital for the bank to expand its ATM (Automated Teller Machine) network. They feel that the bank will lose its competitive edge and lag in the market if this particular IT initiative is not adopted. After all, any company always looks for newer avenues to extract maximum competitive mileage.

These investors and shareholders now put pressure on the senior management to adopt this IT initiative. The senior management in turn informs the IT Head about the need for the project and categorizes it as essential.

Now the pressure has reversed. The IT Head, who in the earlier scenario had to put pressure on the senior management for approval, observes that the project approval has come instantaneously. The pressure is now on the senior management. The need to justify ROI on the subsequent investments is reduced significantly.

However the need to justify ROI will not be altogether eliminated. The IT Head will still have to pass through the financial 'gate' I spoke about, and the gate will still play the game of 'twenty questions'. Although this time it will be much easier to pass.

Vendors' role
Vendors of equipment and solutions usually have a ready ROI calculation to show you. And it usually looks very good on the brochure. But how much faith should you really keep on the figures provided by your vendor? After all a vendor is focused on plugging his products into your enterprise, and would always highlight the brighter side, in most cases over-emphasizing the benefits.

Let us consider the analogy of a car. A car salesman will claim that a particular car will offer a mileage of 12 Km for every liter of petrol. And the claim is valid under certain conditions. Now, I am certain that there were many assumptions made in order to arrive at this figure. The assumptions were that the roads are smooth, the radials are new, the air-conditioner is off, and the engine is perfectly tuned. And perhaps the entire test was made in a closed room on a set of rollers.

The IT Head will have to ask the vendors the assumptions. I don't say that the vendors will fool around, but they are smart enough to skirt the issue and claim later that they were not asked all the details in the beginning. An IT Head who doesn't do the homework properly will believe the figures blindly and pass it to the senior management. In such situations, the IT Head will fail to explain the "readymade ROI justification" to the top management at a later stage when the project is implemented.

A smart IT Head will ask how the data was collected and perhaps look at the number of transactions the new system can support compared to existing/previous systems. This directly leads to a quantitative measure of performance of the proposed system. By carefully planning and establishing the measurement criteria in the existing systems, the IT Head can easily demonstrate the savings and justify the ROI for the proposed solution.

Ashirwad Tillu is Corporate Head at Mahindra British Telecom Limited

 
     
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