Re-Drafting IT & the ITO
IT RoI, the Indian way
have the task of convincing top management about the viability of new IT initiatives.
This is where RoI measurements play an important role. So how do Indian enterprises
measure RoI and benchmark themselves against global competition? Kumar Dawada
To measure is to know
- Lord Kelvin
Return on Investment (RoI) is the method by which a CIO establishes credibility
in the eyes of the top management. It is not just a financial accounting exercise
since the CIO is accountable for IT budgets in most organisations. When the
CIO takes up this accountability and delivers desired results, it builds his
credibility with the top management. This helps ensure faster IT initiative
approvals in the future.
The Case For ROI
Satish Pendse, CIO, Hindustan Construction Company feels that
contemporary CIOs have to devote considerable time on RoI calculation because
the quantum of investment in IT has increased. It is a substantial part of the
total investment and cannot be taken casually. As the business becomes
more competitive, everybodys accountability increasesespecially
big spenders like IT, says Pendse.
Decision makers need justification from IT investments. Pendse is of the view
that most investments other than IT get justified naturally even if they are
not on paper because they are related to the organisations core expertise.
For instance, investing in a marketing exercise or erecting a factory
does not have to be justified to the top management in minute detail. It directly
relates to their core business, so they know its significance very well,
This is why CIOs unanimously agree that RoI measurements make it easier to sanction
new IT initiatives. Moreover, the relationship between the CIO and CEO or top
management is also crucial for approval. If the CEO does not understand the
project, his judgement is based solely on his CIOs credibility.
This trend is justified by Alok Tandon, Country Manager, India, SSA Global Technologies
who points out that todays IT departments are considered profit centres
rather than cost centres. IT infrastructure and application are perceived
as mission-critical applications to drive the business forward. In order to
evaluate IT, organisations look at TCO (total cost of ownership) as well as
the tangible and non-tangible benefits they can derive from the IT assets,
He is supported by Sunny John, Country Manager, India, Quantum. Measuring
RoI is essential for IT assets because it is related to profits of the organisation
making use of that technology, says John.
RoI And India inc.
RoI measurement methods in India vary across organisations. However, manpower
can be singled out as the most central consideration.
Sanjeev Goel, Senior Vice-president, IT, Hindalco feels that custom methods
for specific needs are more suitable for the Indian business model. Goel is
of the opinion that the organisation should only quantify the benefits related
to cycle time, inventory and efficiency of productivity.
Methods like TCO, Economic Value-Added (EVA), portfolio management and
balanced scorecard method can be used. These are good frameworks and help in
understanding the concepts. Each company has to discover which method suits
it best. This depends on the organisational culture and the employees,
A Case For Benchmarking
Benchmarking compares an organisation with a local or global organisation. Pendse
feels that organisations should do internal case studies, whenever they start
If a case study of other organisations in the same industry is available,
then study them and benchmark your organisation against them. They may have
done some important things which you have missed. Learn from their success and
failures, advises Pendse.
Goel echoes these sentiments. Any improvements performed
(even through internal benchmarking) are always good for the company. If data
or public reports are available from other organisations, then that data must
be used by all means to benchmark and improve your organisation, says
Many times when a CIO says that IT can deliver a particular result, there may
not be enough conviction at higher levels. However, when a CIO uses the
specific example of a local or global competitor and how it has achieved a specific
target, it becomes difficult to ignore for the management, says Pendse.
Since a CIO knows what others in his field have achieved, he can always devise
new ways to achieve a little more than that. Benchmarking also helps keep people
on their toes. If a CIO is able to justify how his organisations benefits
are less than what other organisations are getting, he will also identify why
his organisation is failing to attain a desired level
In the case of software like enterprise-wide applications, benchmarking helps
evaluate vendors, their products, features, references and cost of ownership.
It also helps identify if the software solution is scalable, manageable
by the in-house team after implementation, easy to use and interoperable with
existing IT infrastructure, says Tandon.
Due to global exposure, organisations benchmark themselves not only against
local but also global competitors. This is because the Indian enterprise sector
is fully aware that eventually their competitors will be global. Companies
realise that if we are well prepared, then global players will have to compete
on our terms. Else we will be forced to compete on their terms, explains
Todays Indian businesses know that technology plays a significant role
at the global level. They want to improve their position and the best method
for that is to benchmark themselves with the global leaders if possible.
Getting Intangible Benefits
The purpose of RoI measurements is to find tangible and non-tangible benefits.
Pendse is of the opinion that non-tangible benefits always reflect in an organisations
balance sheet as well as its profit and loss account.
Intangible benefits can be increase in profits and revenue
or cost reduction in the same year or subsequent years. The topline or
the bottomline of the current year or the long term is definitely affected.
The CIOs objective is to establish this relationship
Intangible benefits can be increase in profits and revenue
or cost reduction in the same year or subsequent years. The topline or the bottomline
of the current year or the long term is definitely affected. The CIOs
objective is to establish this relationship.
Intangible Measurements In Action
Tangible benefits are easy to measure. However, in case of non-tangible benefits,
the linkage with leading indicators has to be clearly established.
For instance, consider an FMCG organisations sales initiative. There is
a need to save a salespersons time. Now suppose that due to lack of time
the salesperson focuses only on fast moving items.
At this point, automation will allow the salesperson to focus on slow moving
items as well. Now sales of the slow moving item will increase. Issues crop
up at this point such as how the use of time can be converted to an equivalent
in money. So how can the CIO calculate by how much a specific amount of extra
time will increase the sales?
Pendse outlines a simple method. Approach the user department which benefits
from the initiative. Explain to them how the extra time given to the sales person
will help him focus on slow moving items, suggests Pendse. If they agree,
they must be asked to estimate how much time will lead to how much increase
Three or more experienced people will apply their logic and give different
figures. Make them agree on a common figure. For example, lets assume
that they decide that one hour saved increases sale of slow moving items by
five percent, says Pendse.
According to Pendse, ITs role in this case is to establish that one hour
is actually saved. This is the leading indicator. As long as IT fulfils leading
indicators, it can say that established benefits owned by business leaders have
happened. This means that if one hour is saved, then five percent increase
in sales is also happening. The sales department is getting the benefit of this
initiative. This is a great way to measure intangible benefits, explains
Pendse feels that the balanced scorecard method is more effective than other
financial measurements including RoI. It balances the responsibilities in terms
of financial performance, internal business processes, operations, innovation
and learning as well as customer satisfaction.
Indian enterprises are trying to extract the best of
both worlds when it comes to RoI measurement. They use some of the measurement
concepts from the West and integrate them with Indian conditions
If a profit centres performance is measured only on
topline or bottomline, then the business head can sacrifice the future to show
an impressive profit or saving. For instance, he can stop advertisements
and show costs saved as benefits. However, the balanced scorecard method has
the advantage of giving benefits across current and subsequent years. It highlights
and gives the collective score of overall organisational performance. Its
more than just financial behaviour, elaborates Pendse.
In short, Indian enterprises are trying to extract the best
of both worlds when it comes to RoI measurement. They use some of the best measurement
concepts from the West and integrate them with Indian conditions to get the
best possible results.
|Balanced Scorecard Method
Robert Kaplan and David Norton introduced this method
to give business managers a fast and detailed view of the organisations
overall business performance. It helps the organisation clarify its vision
and strategy and translate it into action.
The method is based on four types of linked performance
indicators like finance, customer satisfaction and internal business processes
as well as employee learning and growth. It acts not only as a measurement
system but also as a strategic management system and a communication tool.
The IT scorecard forges a link between business
strategy and IT initiatives by ensuring that every IT deployment delivers
according to the business objectives. The only problem with this method
is that it needs a committed top-level management to ensure its success.
Economic Value-Added (EVA)
Until a business returns a profit greater than its
cost of capital, it operates at a loss. It is destroying wealth instead
of creating it. EVA corrects this error by recognising the fact that when
business managers use capital, they must pay for it like wages.
EVA considers the net operating profit minus the
charge for the capital invested in an enterprise. It considers all capital
costs and shows how much wealth a business has created or destroyed in
each quarter. A sustained increase in EVA leads to increase in the market
value of the company.
Users And RoI Measurement
IT cannot bring or measure the benefits by itself. These are brought in by the
functional users for whom the IT tools are being implemented. If you dont
involve the users then the benefit will not happen, says Goel. He feels
that end-to-end user involvement is critical to achieve measurable benefits.
So how can the involvement of a business user be measured? The best indicator
is to check if the user benefits in his KRA. If yes, then it means he is involved.
Business heads should be in the driver seat and the CIO plays a supportive role.
This is the best type of IT initiative, explains Pendse.
Most people do not realise the impact their effort has on the companys
bottomline. But once they are aware, they take pride in how their day-to-day
performance has improved, says Goel. He feels that RoI and performance
measurement introduce the element of challenge in an otherwise mundane job.
BFSI and the retail sectors are the path blazers when it comes to IT RoI measurements.
Due to better IT initiatives, the overall business performance measurement scenario
has an exciting future in India.
It will have tremendous repercussions on the business front. At a macro level,
cycle times and efficiency of organisations will improve considerably. Profitability,
cost benefits and all other measurement values will constantly improve as organisations
keep improving their overall performance.