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
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.
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
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 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."
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.
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
"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 email@example.com
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.
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.
companies like IBM Global Financing and HP Financial
Services provide these kind of services.
to the user company
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.
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
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."
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