Why I Never Look at the Value Case or ROI
By Mark Tonnesen
When evaluating potential IT initiatives, the most common approach is to focus on the numbers and look at the return on investment (ROI) or value case. For example, say your company is considering implementing a new Enterprise Resource Planning (ERP) system. Chances are the CEO and CFO will ask, “What’s the ROI?” Or, “If the new system will cost $10 million, can you show me how it will produce a much greater gain?”
As far as I’m concerned, though, if you’re asking about the value case or ROI when evaluating IT initiatives, you may be asking the wrong question and looking at the wrong things.
What You Should Be Asking when Evaluating IT Initiatives
What gets lost in the value case or ROI approach to evaluating IT initiatives are the bigger questions that are more important than the finance-driven calculations:
What problem(s) are we trying to solve?
What is the value to the business of solving this problem?
What objective/end state can we achieve with this initiative that we don’t have today?
What’s the best way to achieve our business objectives?
How important is solving this problem or achieving this objective for the business’ ability to reach its goals?
How will this help us make better decisions and run our business more efficiently?
Not Everything Can Be Measured (Using the Same Yardstick)
A problem with the ROI or value case approach is that you might be trying to quantify the unquantifiable. For example, say you are considering implementing wireless internet service throughout your office for $XX per month. How do you calculate the ROI on this? You can take a best guess at how this might improve productivity and come up with a number. But that would just be a guess. And it would ignore other factors, such as the positive impact this might have on employee satisfaction or addition benefits such as mobile applications. Once new capabilities are in place and available to the full team, they may lead to unexpected innovations and enhancements that further improve productivity. It is difficult to predict the benefits new capabilities unleash.
The Numbers Can Tell You Anything You Want to Hear
Your team’s best guess regarding the ROI of a proposed IT initiative is just that: a guess. As an example, I once worked with a large high-tech company that was big on ROI. The team worked on a series of technical support initiatives to develop self-service tools for customers. To justify these projects the team put together graphs showing a reduction in customer support cases and calls, and an increase in customer satisfaction.
Knowing what the cost of a support call, the team developed analyses that showed that the cost of each initiative was lower than the cost savings it would deliver and the projects were approved. Unfortunately, the projected savings never materialized. The team neglected to include factors such as growth, customer adoption rates, issue severity addressed by the tools, continuous improvement costs and operational support costs for the tools. An analysis that included all the right factors—beyond just cost—would have helped the company make a better business decision.
Where to Focus: Business Impact
When evaluating IT initiatives, I recommend steering clear of the value case and ROI approach. Rather than pulling numbers out of the air to justify (or kill!) a program, take a hard look at the business impact that the initiative will have. Ensure you are solving the right problem and include measurement points along the way to check whether the expected goals are being achieved.
Mark Tonnesen is a partner at StrataFusion. Contact him at email@example.com; follow Mark at twitter.com/mtonnese.