VideoOne by one, they rose to make their pitches to the IT steering committee. As the day wore on, recalls consultant Doug Hubbard, business cases were presented for more than 20 IT projects. Each was framed in terms of the tremendous savings and benefits it would provide for the company, a giant midwestern nuclear-power utility. One skeptical attendee listened closely and entered a series of figures into a calculator. Toting up the promised benefits of each proposal, he announced, "If we signed off on all of these, we'd be able to cut staff by 110 percent."
Writ large, Hubbard's tale reflects the past decade's blind faith, massive investment, and sometimes bitter disappointment in information technology. A recent study by technology research firm Gartner concluded that 20 percent of the $2.7 trillion spent worldwide on IT in 2001 was wasted. Others have found little or no correlation between technology spending and corporate performance. "Let's face it. There's got to be some increased sobriety about the value that can be created from technology investments," notes Christopher Dallas-Feeney, vice president, financial services group, at Booz Allen Hamilton. "It was overblown on Y2K. The ERP [enterprise resource planning] era was a bit overstated, and CRM [customer relationship management] is following on its heels."
Little wonder, then, that most corporate buyers are searching for new ways to gauge the payback from IT investments. Eager to oblige, vendors and consultants have trotted out a variety of tools that purport to more precisely measure return on investment. The approaches range from self-service Web sites that cough up an ROI calculation based on two or three inputs all the way up to new software programs costing as much as $200,000. Indeed, the mad rush to ROI is beginning to look like a tour bus unloading blackjack players in Las Vegas: everybody's got a system.
The problem with so much ROI analysis to date is that it's done by the very parties that champion technology spending, from vendors to consultants to systems integrators and outsourcers. When ROI is done internally, it's often done by the department that seeks the funding. "There's a fundamental conflict of interest when the ROI analysis is conducted by proponents of the project," notes Hubbard.
This is not, of course, news to CFOs, or even CIOs. "We try not to justify things too much on soft benefits and wishing," says John W. Prosser Jr., senior vice president, finance and administration, at Jacobs Engineering Group Inc. in Pasadena, California. Allan Woods, vice chairman and CIO at Mellon Financial Corp. in Pittsburgh, goes him one better: "We would not calculate productivity [gains] if there were no headcount reduction." And Ray Seabrook, CFO at Ball Corp., a Denver-based packaging firm, voices the general discontent with soft benefits and the companies that champion them when he says, "Five years from now they're sitting there with all our money in their pockets and I'm still trying to figure out how to measure something like 'employee empowerment.'"
In the face of such attitudes, vendors and consultants have redoubled their efforts to put hard numbers on soft benefits. Hubbard, for example, has created Applied Information Economics (AIE), an ROI methodology he bills as being "truly scientific and theoretically sound." He offers ROI services through his own firm, Hubbard Decision Research, and also licenses the AIE methodology to other consultants.
Steven Hausheer, chief operating officer at Investrics in Chicago, which is building the precepts of AIE into an ROI analysis software program, explains how it works. The basic concept is that things that don't seem measurable actually are. Consider something intangible such as "better employee access to information." Based on input from groups of employees, the Investrics program would try to answer such questions as: Would better information access result in faster decisions? Would it produce better decisions on pricing? Would it produce faster decisions that actually close sales and produce more revenue? Questions can be industry-specific; for insurers, would getting an answer to a prospect within one hour increase the chance of a sale, and, if so, by what percentage?
Similarly, for an oft-invoked intangible such as employee empowerment, the software would use input from employees (gathered by asking questions that have a scaled response, such as 5 for very likely, 1 for not at all likely, and so on) that zeros in on, say, the time that managers spend on supervisory tasks. If a project has, as one benefit, a reduction in such requirements, the process will be able to assign a hard-dollar value to at least one aspect of employee empowerment.
Hubbard says a system that assigns a probability-weighted range of values acknowledges the inherent uncertainty of input regarding projected benefits. Rather than yielding a single projected value, AIE calculations yield a probability-weighted range of outcomes. This range is reflected in the final ROI assessment, which is essentially a collection of such outcomes. Hubbard might, for example, conclude that a client has a 40 percent chance of a 50 percent ROI on a new document-management system. But recognizing such risks as project cancellation and the possibility that users might not fully embrace the system, he might conclude that there is also a 10 percent chance that the project will produce a negative return. Based on input from managers, Hubbard calculates the level of risk that a client will tolerate for a given projected return. If, in this case, managers have indicated they would tolerate as much as a 15 percent risk of negative return in exchange for a 50 percent ROI, the project would get a green light. If management will tolerate only a 5 percent negative return risk, that project would be rejected.
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