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.
Revenue: Rs 544.3 Crore
IT Budget: NA
IT budget as percentage of revenue: NA
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
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
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
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.
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.
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
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
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