I received the following a few weeks ago from Mark Tonnesen (ex CIO of McAfee and of Electronic Arts) and want to share it with you …
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 value?” Or, “If the new system will cost $10 million, can you show me how it will produce a $10 million ROI?”
As far as I’m concerned, though, if you’re asking about the value case or ROI when evaluating IT initiatives, you’re 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-drive calculations:
• What problem(s) are we trying to solve?
• Is there an objective/end state that we’re trying to achieve when we’re done with this initiative that we don’t have today?
• Is this the best way to solve that problem or achieve that objective?
• What is the value to the business of solving that problem? 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?
Everything Cannot be Measured
Another problem with the ROI or value case approach is that you might be trying to quantify the unquantifiable. For example, say you’re 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 and the potential negative effect on productivity of making it easier for employees to waste work hours on their personal activities online.
Liars Use Numbers and Numbers Lie
Your best guess regarding the ROI of a proposed IT initiative is just that – a guess. For example, I once worked at a large high-tech company that was big on ROI. We did a series of technical support initiatives that involved investing in tools that would become self-service tools for customers. To justify these projects we would 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 issue was, we put together numbers that showed that the cost of each initiative was lower than the cost savings it would deliver – and our projects were approved. Unfortunately, the projected savings never materialized. We didn’t include other factors such as growth, customer adoption, issue severity, continuous improvement costs and operational support costs for the tools. So although the percentage of customers with support cases went down, the actual number of support cases and calls did not.
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.