Investing in the Future of the Business

Most IT projects can be described as business improvement investments. They include anticipated returns (usually identified as increased revenue or decreased operating expense) and the acceptance of certain planned and unplanned risks (usually costs). IT projects that are funded based solely on expect returns tend to fall short of expectations. We have all read about the high percentage of technical projects that fail or go over budget. Many of these projects were destined to fail before they started due to a lack of rigorous risk assessment. Conversely, businesses that reject or cancel projects based only on the risk potential tend to quickly fall behind their competition. Ironically, risk-averse companies sometimes fail to adequately assess the risk of not investing in timely improvements. All businesses must grow and change or they eventually cease to exist. Technology investments are a necessity to enable continued growth and prosperity.

Determining the ROI

Before making recommendations, experienced financial experts will assess an individual investor’s level of desire for the anticipated outcome and the level of tolerance for the associated risks. The same holds true for business managers who make technology purchasing decisions. Experienced IT professionals know there is a need to carefully balance the expectations for returns with the tolerance for risks while seeking approval for a project. A good tool for assessing and communicating the expected level of return and risk is Return on Investment (ROI).

At the highest level, ROI is a measure of a corporation's profitability, equal to a fiscal year's income divided by common stock and preferred stock equity plus long-term debt. More generally, ROI is the income that an investment provides in a year. ROI is a textbook methodology for financial managers - and is rapidly being recognized as a critical metric for understanding the value of a technology investment.

Consider that no finance officer can compare their planned investment in a factory or new division to an identical project at another company, to determine what their returns will be - nor can they "baseline" the project before they start and then travel back in time with the data to justify the investment. What they can do is identify what they expect the benefits and costs to be, assess the likelihood of them occurring and the risks of them not occurring, and then make a sound business decision for proceeding with the investment or not. IT projects can - and should - be evaluated in exactly the same way.

Simple Assessment

We can use the following key criteria to quickly assess a project and the likelihood of a positive ROI:

Scope – How many people will be helped by the technology? The greater the number of people, the greater the potential ROI. How often will people use the technology? The more often an application is used, the greater the ROI.

Cost – The more costly the task, the greater the benefit from automation or appropriate technology support.

Knowledge – The greater the potential to reuse the information in the system, the greater the potential ROI.

Collaboration – Communication between employees is costly, so the greater the collaboration component, the greater the potential ROI.

Detailed Financial and Risk Analysis

Beyond this test, a more detailed cost/risk analysis is required, and all benefits and risks must be quantified. For some projects this step necessitates a RFI (Request for Information) sent to prospective vendors and service providers. Otherwise, case studies or similar examples can be reviewed to get an idea of the scale of benefits, or industry benchmarks can be studied to provide guidance on an appropriate estimate for your company. Of course nothing can substitute for past project experience at this point. Battle-hardened project managers can be worth their weight in gold when it comes to assessing the projects expected returns and risks.

Once all data has been gathered, we can proceed to the calculations. There are a number of different financial metrics - and some are more useful than others. Following are the primary calculations and their value to the decision-making process:

ROI – is the most important metric to use for choosing technology and prioritizing projects within a company during budgeting.

Payback Period – is the time it takes for benefits returned to equal the initial cost of the project. This is a key measurement of risk – in the rapidly changing technology area, look for shorter payback periods – and don't be afraid to discard a solution in favor of a better one once it's past its payback period.

NPV – is net present value - the value of the ongoing benefits discounted back to the present year. NPV tells you if the project should not be undertaken, but it doesn't tell you to proceed. If the calculation is less than 0, you shouldn't proceed with the project (you'd be better off putting the money in the bank).

TCO – or total cost of ownership, provides a good metric for budgeting purposes but can't be used to judge the bottom-line benefits of a project because it calculates only lowest cost rather than greatest return. TCO is a metric that is more often used to account for the ongoing operational expense for what the project implemented. Products and technology with high TCO are potential opportunities for replacement or improvement projects.

When the Numbers Don't Look So Good

If the initial calculations yield an ROI less than expected, the next step is to take a closer look. If the ROI is drastically negative, there may be scope issues or unreasonably high costs. If the ROI is simply too low to justify the project, there are potential remedies to explore. At this point we can get creative and explore the alternatives. For example:

Change Cost Timing – Move costs out of the initial year by spreading training or consulting investment over one or two years. This is not always an option, but history indicates that most technology projects will take longer than expected. Schedule optimism is a common occurrence for most projects. Many projects are better served by taking smaller and more precise steps.

Negotiate on Price – A small percentage decrease in price can dramatically increase the ROI depending on the magnitude of the project. Retain an experienced IT manager with experience negotiating vendor contracts. Remember, a negative ROI spells bad news for vendors. A well-developed ROI can provide excellent negotiating leverage in the hands of a skilled and knowledgeable IT resource.

Ramp Costs with Employees – The greater the potential to reuse the information in the system, the greater the potential ROI.

Change Deployment Strategy – Using the technology to support a smaller key (high-ROI) return group first or looking at outsourced solutions or consulting can drive a positive initial ROI - and the technology can be deployed more broadly later. This approach can lead to a smoother adoption and less change management effort.

Re-examine Your Input Factors – If you've been overly conservative with your input factors and productivity gains you may be passing up technology that can help your company. The objective is not to be conservative or aggressive but as accurate as possible.

How Can We Help?

K2 Technical Services has tremendous experience facilitating the decision process for technology projects. We are experts at performing this type of objective analysis. Our K2Pros™ will present recommendations in a way that all business managers can understand. We typically provide several alternatives that identify all of the critical trade-offs. Our primary goal is to help you make the best decisions for your business. Whether a short-term project or a long-term engagement, we rely on our full depth and breadth of experience to ensure you receive the utmost value for your technology investments. Our objective is to become your trusted business technology partner and your competitive advantage.