Effective ROI - Part 1: What you should look for in an ROI tool

The market environment today is markedly different from the one a few years ago. IT purchase decision making is evolving from an exclusive purview of the CIO to a shared decision making model with blended business and technology considerations.

To be effective in today's market environment, Return on Investment (ROI) must transcend the base levels of cross-industry technology and business benefits to show vertical industry and business process-specific benefits from the investment under consideration.

An effective ROI tool allows the decision makers to determine the validity of their ROI statements, which should accurately represent business value.

An effective ROI tool...

An effective ROI tool must go beyond modeling base infrastructure benefits related to horizontal technology investments. It should take into account benefits derived from efficiency gains, productivity improvements, risk reduction, cost/loss reduction, revenue generation, etc. from a cross industry and a vertical specific, and more importantly, business process-specific perspective.

The ROI tool and model must account for all costs related to the investment in question. Initial costs such as capital, licenses, resources, procurement, training, installation etc. must be accounted for, as well as life cycle costs such as maintenance, operating costs, services, etc.

The benefit and cost modeling in the ROI tool must be easy to understand and communicate. Large, complicated spreadsheets make for a poor vehicle to communicate complex ROI models related to an enterprise-wide IT investment. Shared decision making in today's business environment dictates that people other than finance professionals participate in and understand the business value of IT investments. This necessitates a methodology in building ROI statements that makes them easy to understand and take ownership of.

In addition to making a complex ROI easy to understand, the ROI tool must also allow for quick, easy and interactive modification of model parameters or assumptions. This allows for easy what-if modeling and leads to better understanding of the model by the decision makers.

The ROI tool must provide all the key measures of project viability to allow decision makers greatest latitude in choosing the relevant criteria. Project measures such as Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Return on Investment (ROI) must be provided so that the decision makers can evaluate the project along whichever criteria they deem relevant.

The ROI tool should allow for modeling both hard and soft benefits. More effective tools will make a distinction between benefits that:

• Remove exiting costs
• Avoid future costs
• Avoid future costs Improve performance

It will also allow the decision maker to easily choose between including and excluding some or all of a particular class of benefits. In turn, the decision maker will only include those benefits in the ROI statement that they are comfortable counting.

An effective ROI tool must allow for the decision maker to apply Risk Adjustments to realization of benefits as defined in the model. Decision makers bring a unique and necessary perspective to assessing the achievable versus potential realization of any benefit statement. An effective ROI tool will allow the decision to apply Risk Adjustments by benefit statement to produce both a best-case ROI statement and a more achievable and rRisk-adjusted ROI statement.

Not all parameters and assumptions driving an ROI model can be determined with exactness. An ROI tool that allows for modeling uncertainty for assumptions and parameters adds a key dimension to the believability of the ROI model by modeling reality more accurately. With some or all of the assumptions driving the model being uncertain, the project viability measures become forecasts based on the cumulative uncertainty behavior of the driving assumptions. Such sophisticated modeling and analysis capabilities differentiate a world-class ROI tool from the ordinary.

A comprehensive ROI model for an enterprise-wide IT investment may very well have hundreds of assumptions and parameters driving the model. Decision makers need to be able to determine key assumptions so that appropriate time and resources can be allocated to determining their value. An effective ROI will provide Sensitivity Analysis to determine the key assumptions underlying the ROI model for the investment in question so that appropriate time and energy is spent in determining their value.

The juxtaposition of new process and technology in an existing legacy situation (both legacy technology and process) often results in new (and perhaps unique) benefits to a given decision maker. An effective ROI tool allows for modification of existing benefit models as well as addition of new benefits and assumptions to the ROI model in an easy-to-perform manner. Having the ROI tool programming staff change the model rather than making changes interactively in the presence of the decision makers diminishes the effectiveness of the tool.

Parameters and assumptions driving the ROI model are gathered after much research and deliberation. It is not uncommon for values of assumptions to change as research uncovers better answers. An effective ROI tool allows for version control and audit of all parameter changes. This allows the decision makers to have a full record of how the values of the various assumptions evolved to their current set. It also allows the decision makers to revert back to an earlier data set if changes in the current set are deemed unsatisfactory.

Establishing a target project ROI is often not sufficient. Decision makers are being asked to validate the decision by conducting post implementation audits. An effective ROI tool allows the decision makers to do an actual-versus-target ROI comparison for the investment in question.

ROI Tool Checklist

For an ROI tool to be effective it must have the following key characteristics:

• Industry and Business Process-specific benefit modeling
• Account for all costs related to the investment
• Easy to understand and communicate
• Easy to change assumptions driving the model
• Provide key project viability measures
• Ability to model hard and soft benefits
• Allow for Risk Adjustments and Uncertainty Modeling
• Perform Sensitivity Analysis
• Allow for customization of model by modification/extension of base model
• Audit all model assumption and parameter changes
• Provide for Target-versus-Actual ROI comparison

Learn more about Fujitsu's ROI tool - ROI Analyzer