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
Revenue: Rs 31,86,000
IT Budget: Rs 5,00,000
IT budget as percentage of revenue: 15.69
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
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
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.
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.
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
companies, the results for public sector companies are
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
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