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Cover Story: Enterprise-wide IT Projects

Justifying project spend

Approaching top management for project funding may be the toughest thing yet for CIOs. So what's the pitch to make? How are funds allocated? by Brian Pereira

Getting a sanction for funds is a sign that top management has approved the project. Most CIOs will tell you that it's tough work convincing a committee about the need for a project, and how business might benefit. And everyone wants to know how long it will take to get ROI.

Enterprises prepare a business plan at the beginning of the financial year. They plan what kind of projects will be undertaken during the year and how much funds will be allocated. Funds are usually approved at one point of time and included in the IT budget—even if the project goes beyond a year. If the project is broken into modules, then funds are allocated for each module. However projects like ERP are difficult to split into modules, so funds are allocated for the entire project at one time.

When doing project costing one should factor in contingency funds for unexpected expenditure. "For this you need to overstate the costs and understate the benefits," says Satish Pendse, Head-Information Technology, Kuoni Travel (India).

Also think TCO when doing the costing. Besides cost of the solution and implementation expenses, include the cost of support infrastructure—networking, bandwidth, peripherals etc.

"There is a premium in evaluating the cost to the last level. It has to be as specific as possible," says Jason Gonsalves, General Manager-IT & Costing, Goodlass Nerolac Paints.

A problem that could come up when allocating funds is the issue of multiple profit centers. Some departments may not be ready to participate in projects as they may be tending to other crucial issues at that point of time. "In such cases the funds are anyway approved for those departments, but are spent only later," says Pendse.

And what about the person who goes to the steering committee asking for funds? That's a function of the IT head or CIO. His job is to get the most adequate solution at the best possible price. "The credibility of a person who is asking for funds plays an important role," says Pendse.

In most cases the project budget is decided by the steering committee. After that it is presented to the MD or CEO for final approval.

Project ROI

ROI is fast becoming a requisite for companies that are on the verge of investing in IT projects. In the Network Magazine-ORG-MARG survey titled Infrastructure Strategies 2002, 34 percent of IT Heads said they consider ROI an important decision making parameter for IT investment.

ROI can be used for dual purposes: to develop a business case for justification of investment in a particular vertical or project, and also to gauge how well an enterprise is managed.

Simply put, ROI is the benefit, usually profit or cost savings, that accrue from a capital investment. ROI means measuring the intangible or tangible benefits. The benefits realized over a period are: new services, increased revenues, cost savings, improved efficiencies, higher quality products, reduced response time, improved customer services, quicker yield of information, shortened time-to-value etc. Once top management is convinced about ROI, the budget for the project is approved.

With certain projects it is difficult to measure ROI in financial terms. In such cases you talk about the intangibles or business benefits. Infrastructure projects for instance are not driven by ROI. But such projects are essential for the functioning of the business.

While there is much talk about ROI, the things that are equally important are continuous monitoring of project expenditure, monitoring alignment of IT with business objectives, change impact and time-to-value.

Calculating ROI

The criticality and initial high investment associated with any IT project makes it mandatory for the IT Heads to properly calculate and justify ROI on IT budgets.

There are several quantitative approaches that enable you to calculate ROI on IT. This can be done using methods like NPV, IRR, Option Pricing Model, Cox & Rubinstein method etc. However, many CIOs perceive the calculation of ROI in definite, quantifiable terms to be confusing or difficult—and hence avoid it.

ROI is best justified when the results are expressed in monetary terms, though that may not always be possible. The value may be a result of either reduction in cost or increase in revenue.

There are two kinds of problems that may arise when doing the ROI calculation. The benefits are not associable to the IT initiatives. Second, how do you measure the intangible benefits?

"To tackle the first problem I use something called 'leading indicator.' I ask what is it that ERP is giving, because of which sales have increased by 10 percent?" says Pendse. "The answer to that one is ERP offers better forecasting techniques thereby reducing forecasting errors and hence loss of sales—leading to the increase in sales."

Gonsalves believes it is difficult to articulate an ROI upfront for certain technologies "In such cases I need to give the MD a plan of how ROI will evolve over a period of time."

There are many ways of dealing with intangible benefits (the second problem). Some say the easiest way is to exclude it from the project evaluation cycle. There are some projects that cannot justify the intangible benefits.

Though it is difficult to quantify the business benefits, you could get the same from the business heads and users. This can be done through in-house interviews, surveys etc—but the process could take months.

Cooling period

ROI cannot be immediately realized. After project roll-out you need to review the effect of the implementation on your business, the internal users, partners and customers—to see how the new solution has been accepted. Pendse calls this the 'cooling period.'

"There is a standard payback period for any project. It comes from shareholder expectations on ROC (Return on Capital). On that basis you decide the payback period for the project. I feel it takes three to four years for payback," says Pendse.

However for some, that period could be shorter.

"We have done several projects and in most cases the ROI is realized in the first year. But when applying new technologies, like using the Internet for trading, we plan for a period of five years," says S.B. Patankar, Director-Information Systems, The Stock Exchange.

Brian Pereira can be reached at

Vendors help with finances

In India, the IT budget is usually figured as a part of the entire enterprise's annual budget. And the annual budget is usually arranged by the CFO from a large bank/financial institution, or from internal revenue resources. CFOs usually don't consider a separate financial services company from who it can borrow for the IT budget and expenditure.

But in reality, borrowing from a vendor-managed or vendor-partnered financing company can provide a number of benefits, which a 'plain-vanilla' contract of a financial institution may not be able to provide.

In India companies like IBM Global Financing and HP Financial Services provide these kind of services.

Benefits to the user company

The biggest benefit is that the user company has the option of protecting itself from technology obsolescence. Meaning, the customer could take a lease for two years with an option to extend by one year. If the company wants it can return the equipment and pay the full value of the principal.

Another significant benefit is that, the user company has the benefit of asset disposal and management. A customer can return the equipment if it wishes, and the vendor financing company can re-market the same equipment to another user. This user may not want to spend too much and may not need contemporary IT technology for its business. This helps to reduce the ownership costs of the first customer.

Finance from vendor-managed companies helps overcome capital expenditure constraints. Avinash Shah, Country Manager, IBM Global Financing, says, "Organizations can commit resources only for the technological life of the asset as opposed to the physical life of the asset. The IT costs could be 'variabilized' and charged to the Profit & Loss statement, instead of being capitalizing in the balance sheet."

Other benefits are that the interest rates may be lesser, and the organization may enjoy tax benefits from leasing. Ramesh Vishwanathan, Country Manager - India, HP Financial Services explains, "Leasing is tax effective since the value of depreciation will be taken into account, as opposed to buying with cash. The company's Return on Capital Employed looks better since the operating lease assets do not appear in the books."

— Soutiman Das Gupta

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