How to Gain Confidence in Return on Investment
Why do so many executives have so little confidence in return on investment? Here is an in-depth roundtable report from the voices of CIOs, finance executives and consultants discussing what companies can do to better evaluate their IT projects and initiaThe following is a transcript from a mediated, ROI discussion in August 2003 by CIO Insight. Participants:
- Joseph Barkley, Vice President and CFO for Global Information Technology,
American International Group Inc. (AIG)
- Bobby Cameron, Principal, Forrester Research Inc.
- Denise K. Fletcher , Managing Director, FA Group
- Christopher Gardner, Partner and Cofounder, iValue
- Asiff Hirji, Executive Vice President, CIO, Ameritrade Holding Corp.
- Pamela Cohen Kalafut, Director, Intangibles Practice, Cap Gemini Ernst & Young
- Thomas H. Murphy, CIO, Royal Caribbean Cruises Ltd.
- Atefeh(Atti) Riazi, Senior Partner and CIO, Ogilvy & Mather Worldwide
- Julie A. Schwartz, Vice President of Research, Information Technology Services Marketing Association
CIO Insight: Let me start with the first question: What is ROI? What does it mean? Does everyone agree on what it means? Atti, could you start us off on that? How do people usually define ROI?
Atefeh(Atti) Riazi: It depends who defines it. Mostly, the CFOs define what return on investment is, and its defined from the financial terms. I think a lot of what we do in IT has changed and has evolved. For example, you cannot really use ROI in the way we know it in knowledge management. There are so many areas where you cannot apply the financial point of view to it because the return is not necessarily financial.
CIO Insight: Well get back to talking about the vendors later. Joe, youve been a finance executive, working with IT organizations for many years. Is there a clear definition of ROI?
Joseph Barkley: The answer is yes and no. ROI is an accounting indicator that CFOs are comfortable with, because they know how to define return on investment, there are several mathematical formulas to get to that, and its a number. If you look at the value of IT and tie it to a financial number, that analysis is generally doomed to frustration and failure. ROI is merely one indicator that you can use to rank the project. One of the problems we have with ROI is we cant find it after we finish the project, because the project and the effect are melded into the rest of the budget and the operation. We havent figured out how to go back and find it, verify all of the savings supposedly or all of the effect. Unless youve got a discrete business, by the way; then you can do it.
CIO Insight: But is there a specific definition of ROI within the finance?
Denise K. Fletcher: Yes, of course there is one. However, just like every other kind of modeling, the input is critical to the output. So if you start off your analysis [by] defining a project very narrowly, it is not likely to be representative of the investment. Let me explain what Im saying. If you look at a project, for example, [and say] you need to add storage capacity, and you say its going to cost X number of dollars [and], Im going to get Y return on this project, to me the weakness is that you have to step back to be able to get to the right place. You have to step back and say: How does this fit into the strategy of the company? You cant separate an IT project any more than you can separate a marketing project from the overall strategy. If you step back and you look at the overall strategy, I think that you will find that just about every project has a purpose and a return. To be very specific, I was CFO of MasterCard until a little while ago. One of the major investments that we decided to make was to invest in brand. Investing further in brand meant that we were obviously going to get a lot more response from customers. But to be able to deal with that, we needed to add a lot of storage capacity. Now, I can look at my investment in brand and include in that investment my storage capacity, which is going to give a very positive return, or I can look at it separately which is not likely to give me a very high return. So I think the most critical thing is to go back to a word that [CIO Insight Editor-in-Chief] Ellen Pearlman used earlier: its the alignment, the alignment of the investment with the overall strategy of the company. I think ROI is only a tool, and the tool is only as good as the input that goes into it and as good as the boundaries that are defined around it.
Bobby Cameron: May I make a comment?
CIO Insight: Go ahead, Bobby.
Cameron: I think the series of comments point out two really critical factors. The last one I think is the most important, and that is there is no such thing as an IT investment, with the sole exception of some pure infrastructure cost-saving kinds of things. The justification or the rationalization has to be a complete view, meaning the business and the IT parts. There is no such thing as a standalone IT business investment. The second is that the mechanism, whatever it is, that goes to [the] justification of an investment has to be one that sits with the overall business operation, meaning if ROI or MPV or EVA or whatever is used for business investments, that should be whats used for IT. The flip side, which is frequently the case, is that IT is held to criteria that the rest of the business isnt held to. So, if IT is asked to do ROI and the rest of the firm isnt, then CIOs feel like theyve run against the wall.
CIO Insight: Id like to get back to that, Bobby, but let me get Tom Murphy on the phone. Tom, you told me that ROI has to be very closely connected to alignment as well. Could you comment?
Thomas H. Murphy: Well, I agree with Denise and Bobby, and our approach at Royal Caribbean is [that] we have a very clear business strategy that Ive actually coauthored, and we have then aligned the IT strategy to support all of those business elements. Weve laid out a $200 million investment called Jumpstart that has been approved at the board level with no ROI.
CIO Insight: What is Jumpstart?
Murphy: Jumpstart is our core business systems rewrite over the next three years. There are elements of employee, guest and supply chain to all of those, and we have component projects that make up that investment, and that is aligned exactly with the strategy that the business has put forward. In fact, the board has accepted that the business cannot achieve their strategies if we do not execute these IT projects that are really business projects.
But each of those projects, as they come up, are prioritized by the business and justified by the business for their value. In some cases those [justifications] are very ROI-driven, but in most cases theyre strategic or fit into this jumpstart model. They still have to go through an approval process, but ROI is not the sole measure. There are many measures of that and, again, it aligns very neatly with the strategy thats been laid out for the next three to five years by the business.