Questions regarding investments are ultimately resolved on financial terms, hence the need for a solid ROI. Most organizations use one or more “financial metrics” which are referred to individually or collectively as “ROI”. Among these metrics are payback period – the amount of time required for the benefits to pay back the cost of the project, net present value (NPV) – the value of future benefits restated in terms of today’s money and internal rate of return (IRR) – the benefits restated as an interest rate.
Simple ROI works well when both benefits and costs of an investment are easily known and where the benefits are clearly the result of the investment. This can hardly be said for most IT investments. IT projects typically have cross-functional and cross-organizational impacts and it is sometimes difficult to verify the business value of proposed technology purchases. The challenge is in identifying which costs and benefits affect the ROI and determining whose costs and whose benefits they are within the organization. Bringing in an IT consultant can help gather input from line managers, financial experts, human resources specialists, and senior managers. This also adds a measure of authority, validity and credibility to the proposal, especially when costs are focused on one organization and the benefits have broader cross-organizational impact.
When someone talks about ROI, they are really asking: “What will I be getting back for the money you’re asking me to spend?” There is no hard-and-fast rule on how to measure the true economic benefits of IT but this set of questions can lead you to preparing a better ROI.
1. Are the expected benefits derived solely from the investment costs?
2. What time period does the ROI cover? What are the cash flow projections over this time period?
3. How do you ensure that all costs are covered? Can these be summarized in a simple cost model?
4. What is the probability of achieving the projected ROI? What are the risks that could affect the outcome?
5. What contingencies have to be managed?
6. Have the assumptions and methods for deriving ROI been validated?
Decision-makers make IT project selection decisions based upon the perceived value of the investment. IT’s potential for producing positive impacts on the overall business may not be directly measurable but are nonetheless undeniable. Examples include improved customer satisfaction, better information and collaboration, workflow improvements and shorter cycle-time.
An IT consultant can highlight benefits that may not be readily visible but actually contribute to an important business objective. There is the danger that a business may refuse to improve its technology because of unrecognized benefits that were not factored into the decision process. An IT consultant can likewise raise awareness about unknown risks and question unrealistic assumptions.
ROI makes very good sense when comparing expected returns to expected investment costs, but ROI is more than just numbers. Make use of IT consulting to help you present your proposal that shows value beyond ROI.