CIOs pay more attention to the intangibles
when measuring the success of a particular IT initiative.
But is this the right approach?
CIOs are faced with the perennial
question: How do you measure the success of an IT investment?
Should the benefits be measured in pure financial terms?
Or do companies need to look at the intangibles as well?
In our July 2002 issue of Network
Magazine ("Realizing ROI on IT"), we had asked
prominent CIOs from different industry verticals, how
do they justify or measure success of an IT investment.
And we ended up with a very mixed bag. Some believed
that calculating the ROI on IT investment is futile,
since technology has crossed the line from being just
an enabling tool and is very much interwoven with business
processes. Others were of the opinion that given the
sluggish business environment it was absolutely necessary
to justify every penny that was put into IT. Then there
were the moderates who felt that one needs to look at
bothfinancial metrics as well as intangibleswhen
calculating the ROI.
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the real scenario?
We asked 300 CIOs if they considered non-financial parameters
important when evaluating the success of a particular
technology. Almost 62 percent CIOs say that one needs
to look at non-financial parameters. The reasoning:
Financial measurement metrics may not be able to provide
the complete picture.
So what parameters do CIOs consider
important to measure the success of their company's
Almost 45 percent of the CIOs believe that 'Customer
satisfaction/Value' plays a key role in measuring the
success of an IT investment. This is an important development,
since companies are clearly focused on improving customer
service. The interesting part is that CIOs are trying
to map success of an IT initiative directly to 'Custo-mer
satisfaction/ Value' gained. Here the customers are
both internal (emp-loyees, suppliers, distributors)
as well as external. Busi-nesses are trying to create
a harmonious environment wherein the emp-loyees, suppliers,
distributors, and the end-customer can benefit by usage
This is followed by Reduced
cost, Project is completed on time, and Increase revenue/profits.
Cost reductionone of the main reasons why companies
invest in ITcomes second only to customer service.
Companies, given their customer-centric approach, are
focused on retaining existing customers and acquiring
new ones. The logic: a satisfied customer will automatically
translate into increased revenues/profits.
CIOs think that parameters like
'ROI,' 'TCO,' or 'Reduced headcount' play a considerably
lesser role in determining the success of an IT investment.
Who all are involved in measuring
the IT performance? 60 percent of the CIOs said functional
heads play an important part when measuring IT performance.
This is followed by the CEO (57 percent). Interestingly,
the CIOone who is responsible for implementationdoes
not play a significant role in measuring IT success.
As per the survey, Internal Rate of Return (IRR), Net
Present Value (NPV), and Economic Value Added (EVA)
are the most common methods used for determining the
ROI. Of these, IRR is the most prevalentnearly
26 percent CIOs apply this method.
Calculating the ROI for an
ERP implementation may involve juggling with multiple
variables; one has to consider the cost savings in terms
of reduced inventory, faster production processes, or
better inter-departmental communication. On the other
hand, ROI on an enterprise-wide VoIP application would
be as simple as calculating the cost savings by making
voice calls over the existing data network instead of
the telecom network.
32 percent of the CIOs do not
employ any financial technique to determine the ROI.
These CIOs rely entirely on the intangible benefits
gained from an IT implementation instead of calculating
it in pure money terms.
Of these, nearly 36 percent
feel the right time frame for accessing the ROI is six
months after implementation.
The survey clearly points to the fact that most CIOs
focus more on the intangibles than the money returns
when it comes to measuring the success of a technology
implementation. The question is: Is this the right approach?
Given that IT is firmly woven
with various business processes, it's understandable
that one needs to consider the issue of not being in
business, or being unable to compete in the market if
basic IT infrastructure/automation is not in place.
But one needs to look at the financial part as well.
A certain level of financial
discipline will help an organization manage its existing
IT infrastructure better. ROI calculation will bring
about this discipline.
The right approach would be
to give equal importance to both: ROI techniques as
well as the intangible benefits when measuring the success
of an IT investment.
- 62 percent CIOs believe one needs to consider
non-financial parameters when evaluating the
success of an IT investment.
- The top three parameters for measuring the
success of an IT implementation are 'Customer
satisfaction/Value' (45 percent), 'Reduced cost'
(39 percent), and 'Project is completed on time'
- Parameters like 'ROI', 'TCO', or 'Reduced
headcount' play a considerably lesser role in
determining the success of an IT investment.
- Functional heads play an important role in
measuring IT success.
- Internal Rate of Return (IRR) is the most
prevalent method used for calculating ROI.
- 32 percent of CIOs do not employ any financial
metrics to determine ROI.
Inamdar, Vice President, Finance & Accounts,
Garware Polyester Ltd., is of the opinion that
since IT provides both tangible and intangible
benefits, it may not always be feasible to calculate
ROI on IT investment
Given that IT is a vital business enabler,
is it necessary to calculate ROI on technology
investments in the first place?
It is not always necessary to calculate ROI on
technology investments. This is because investments
in IT provide a number of benefits, which are
both tangible and intangible. And it also provides
a valuable capability to a company of carrying
out change management. In such a case it's not
possible to look for ROI on technology investments.
Besides, companies will lose business and market
share if they don't use technology, due to lack
of relevant information.
In a CFO's eyes, how does IT help in change
Here's a typical example of large companies in
India before the days of computerization. The
companies were running rather successfully at
that time. Soon, the economy opened up, and competition
suddenly sprung up from other national and international
Standing at the threshold of this new economy,
Indian companies had to concentrate on aspects
like quality of products, accessibility, time
to market, and service to customers. They also
had to introduce systematic processes and transparency
of operations. But these issues were never addressed
by the companies before.
So the companies knew they had to change, but
were worried about how they could change the traditional
flow of operations and management, that had existed
in their organizations for years.
The solution was IT. The companies had to deploy
robust LANs, WANs, enterprise application packages
that automated systems and organized data transactions,
and round-the-clock management of operations to
stay in competition. So, every time a company
uses a hardware or software product, it is actually
introducing a change.
A change for the better. Against this background
of Business Processes Reengineering (BPR) and
change management, how do you measure ROI? The
user company is making a vital transition to a
more informed state for immediate and future benefits.
But traditionally, doesn't the CFO understand
First let's change the definition of a CFO. A
CFO is a business integrator. He's not only a
financial officer. As a business integrator he
has to set up a bridge between the past and futureold
technology and the new. He has to bridge management
vision and the realities of a business.
If a CIO promises 35 percent ROI, a CFO can
insist on 50 percent. If the CIO promises 50 percent,
the CFO may insist on 100 percent (return within
one year). The CFO doesn't really have a benchmark
to judge ROI, so there's no point in putting a
few mundane figures on a sheet.
Is it possible to quantify payback?
A traditional model for quantifying payback says
you must look for results like reduction of inventory,
savings in manpower, and reduction of delivery
time. But a CFO doesn't factor in all this.
This is because the store manager has to bring
down inventory by 15-20 percent every year anyway.
It's a part of his duty to continuously bring
down the inventory level. The HR and Logistics
teams should also perform their duties with a
natural eye on efficiency.
The CFO may look at other benefits like better
cash flow and faster documentation. Better cash
flow can happen because the CFO can check the
status of outstanding debtors (companies that
owe money) at the press of a key. Faster documentation
is necessary when the company has applied for
export benefits and the necessary documents like
the balance sheets, sales history, and other records
need to be extracted in a hurry.
If the CFO checks for ROI, how does he/she
know that the IT deployment project has failed?
The failure of an IT project like ERP, CRM, and
SCM will automatically be reflected in the Profit
and Loss (P&L) account. There should be a
notable change in figures.
For example, material consumption in a company
is 40 percent of the sales price. By natural improvement
it may go down to 38 percent or even 37 percent.
But after deployment of IT, if the figure goes
up to 50 percent, it means that the use of technology
has failed. But if it goes down to 30 percent,
the technology has succeeded.
Goswami, Senior Vice President, Finance &
Accounts, UTI Bank opines that core IT investments
need not be scrutinized for ROI. However, for
non-core IT projects, ROI needs to be calculated
IT is considered a vital business enabler
in banking. Is it necessary to calculate ROI on
technology investments in the first place?
If an investment in any area in an organization
will help satisfy the business needs and objectives,
the investment will not be questioned. It is not
always necessary to calculate ROI on that investment.
So if an IT investment aims to fulfill business
strategies, there is no need to look for ROI in
the IT investment.
In an organization like a bank, certain resources
are absolutely necessary. When a new person joins
the team, a desktop workstation has to be provided
for him/her. In a bank, there are Government regulatory
requirements, that state the minimum amount of
required infrastructure like backup, storage,
and applications, that the company must have.
Calculation of ROI for this is unnecessary.
Other than these core investments, there may
be support projects. In these cases, an organization
may need to calculate the ROI. The company may
have to put numbers to the expected benefits,
and look at payback periods.
What if IT infrastructure expenditure is
very high in some organizations?
Organizations where IT expenditure is high can
select a group of people to form a steering committee.
The members may be business heads of different
departments, and will include the CIO and the
CFO. The group will take an overall organization
perspective, and not just a CFO's or CIO's point
The IT solutions and its benefits may be discussed,
and aspects like scalability to handle future
growth are mapped. The CIO will have a paramount
view of the technology, and the committee will
discuss the business implications of the solution.
This will help make the decision.
Is there a standard model with which ROI
on technology-related expenses can be calculated?
There are standard models available like NPV.
These models will need the organization to look
at aspects like expenditure, cost of acquisition,
income, and discount the cost of capital.
But in India, most companies are at a stage
where almost all large IT projects are core to
the company. The companies need to use IT to perform
better. So most IT investments now have a lot
of practical value.
So you don't favor calculation of ROI on
If the IT solution is well aligned with business
needs and automates the core business tasks of
the company, there's no need to look for ROI.
Investments, without which the business will keep
running, may need to be evaluated.
For example, investment in storage components
may be debatable, whether the company needs it
now or later. But a simple discussion with the
CIO regarding its benefits can clear the matter.
However the cash flow of the company is important.
The CFO needs to see whether the investment is
calibrated with the cash flow situation of the
company. A cash squeeze situation can be an inhibiting
factor, especially since cash flow is measured
in hard numbers.
How will the CFO evaluate the success of
an IT investment?
An experienced CFO will use a set of financial
indicators and track the figures on the various
reports like balance sheets and P&L accounts.
The CFO can identify the problems and ask the
CIO about the recommended action to be taken.
The CFO and CIO need to work in close coordination.
None should work in an ivory tower.