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Issue of July 2002 
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REALISING ROI
ROI on IT-Not much quantity
Bhavin G. Kadakia

IT has evolved and is now a vital enabler for many large businesses. And in case of businesses like ISPs and telecoms, the IT infrastructure is what the business is all about. In such a scenario, investment in IT is as essential as breathing and eating. Does one still need to calculate returns on it?

It's very natural for the higher management to look for a realistic value of ROI for its IT projects. Unfortunately, ROI on IT investments is not always in the form of hard cash. One can really not expect direct and immediate ROI on IT expenditure. This is because the ROI in many cases may be intangible, and therefore invisible.

To put it plainly, the management cannot 'see' ROI, and can only 'feel' it. The returns and benefits are embedded into the systems and operations. End users benefit due to the various 'betterments' in business processes.

Indian Merchant’s Chamber

Industry: Trade Organization
Revenue: Rs 31,86,000
Employees: 85
IT Budget: Rs 5,00,000
IT budget as percentage of revenue: 15.69 percent

Although it's natural for the higher management to ask for ROI on IT investments, it is difficult to set a quantitative value to it. On the other hand, the qualitative benefits that are difficult to put on paper, are very high

Impacts
The 'betterments' can be in various forms. One can measure ROI in the form of improvements in efficiency, productivity, and quality of work for customers. There may be improvements in service levels to customers, and customer satisfaction may move northward. Business processes may be automated and thus communications may become fast, reliable, and economical.

There may be reduction in the cost of operations by way of savings on communications. For example, telephone bills will come down as more people use e-mail and also take advantage of technologies like VSAT, Web, and VoIP. A successfully deployed IT project may enable business process automation and make it quick and easy to access data and information from a centralized database. This saves many man hours of work. And there may even be reduction in HR spending owing to less overtime wages and perhaps employee downsizing.

But in spite of such a high impact on the business, since the return is not in the form of money, it is very difficult to not only justify but also quantify the ROI on IT spending.

Indirect returns
The Financial Director/ Controller/Company Secretary is quite used to ROI being justified in areas like fixed deposits, capital markets, and debentures. This is mostly because there is an actual increase or decease in revenue returns making it possible to be quantified in terms of real money. The top management is likely to believe the same because the auditor will certify the values in his audit report.

A well-planned project gives indirect ROI. The indirect returns are in the shape of better response time, decrease in production cycles, lesser time to market, less buildup of inventory, and more transparency in operations.

These indirect returns are not quantifiable and thus may be difficult to be explained to the higher management regarding effectiveness.

Varying ROI
ROI has a tendency to vary every year in case of IT. The difference usually follows a market trend. There are various tools, techniques, and experts available to measure the ROI in other sectors, but not so much for IT. Every IT project will not equally lend itself to the calculation of quantification of benefits.

It is noticed that ROI of an IT project in case of a public sector company is always lower than the private sector. Although an auditing process is carried out for IT projects in most public sector companies, the results for public sector companies are highly inconsistent.

The way I do it
The Indian Merchants' Chamber (IMC) was set up in 1907 and is a premier chamber of commerce and industry in the western region. As an apex body of trade, commerce and industry, IMC has a membership of 3000-odd corporate bodies and supports 200,000 members through its affiliates. In IMC, investment in IT is not only necessary but also mandatory to survive in a competitive world where the higher management will always ask for ROI.

I always involve the various departments in my organization, especially the finance department, and use the inputs to prepare a presentation of ROI in IT projects. I collect data which talks about expenses incurred by the organization for accomplishing tasks in the pre-computerization days, and match that with a report of expenses incurred to accomplish the same tasks on a post-computerization scenario.

This enables me to calculate the net savings and thereby reduce costs. I also study the last year's annual report which comprises the P&L account and the balance sheet. The higher management of any company is always very impressed if you are able to generate 15 to 25 percent ROI within the first year of implementation of an IT project.

My IT budget
In my IT budget I place a lot of emphasis on training. Training plays a very important role in IT because without it one can not achieve the true goals of using IT. In the IT world, changes are dynamic as new technologies evolve continuously. Therefore, the CIO has to keep learning and enhancing his knowledge at every stage.

Doctors we're not, so learn
In my experience, the people in the IT community are more professional than doctors. This is because doctors do not have to update their knowledge and learn about advancements in medicine as frequently as IT professionals. A doctor/surgeon who has attained a degree in medicine 30 years ago can still operate on a patient because the operation procedures are more or less the same.

An IT professional who graduated five years ago with an Engineering Degree in Computer Science may not able to manage and monitor even a high-end server or a Layer 3 switch today. Unless he/she has been keeping up with the changing technologies. This is because systems are evolving very rapidly. In the early days of networking, we had learnt about Novell as one of the predominant OSs. Now we see a lot of Linux and NT around.

The idea is to keep learning. If you want utilize IT to the maximum, I suggest that 25 percent of your total IT spending should be spent on training.

Sometimes the high cost of training, especially if it's in a niche area of IT which requires personnel to be sent abroad, dissuades the management from allowing a high training budget. In this case outsourcing the particular skill may be more economical.

It's always the IT Head's call as to how best he/she will be able to justify ROI. And it's all about the IT Head's convincing powers as to whether the management continues to believe in its qualitative power.

Bhavin G. Kadakia is Head-IT at Indian Merchants' Chamber

 
     
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