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Issue of March 2006 
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Re-Drafting IT & the ITO

IT RoI, the Indian way

CIOs 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 finds out

“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

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, everybody’s accountability increases—especially 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 organisation’s 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,” explains Pendse.

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 CIO’s credibility.

This trend is justified by Alok Tandon, Country Manager, India, SSA Global Technologies who points out that today’s 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,” says Tandon.

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,” says Goel.

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 an initiative.

“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 Goel.

Benchmarking Perks

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 organisation’s 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 Pendse.

Today’s 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 organisation’s 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 CIO’s 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 CIO’s 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 organisation’s sales initiative. There is a need to save a salesperson’s 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 in sales.

“Three or more experienced people will apply their logic and give different figures. Make them agree on a common figure. For example, let’s assume that they decide that one hour saved increases sale of slow moving items by five percent,” says Pendse.

According to Pendse, IT’s 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.

Measurement Methods

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 centre’s 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. It’s 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.

The Best IT Measurement Methods
Balanced Scorecard Method

Robert Kaplan and David Norton introduced this method to give business managers a fast and detailed view of the organisation’s 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 don’t 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 company’s 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.

kumard@networkmagazineindia.com

 
     
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