The 411 on Technology ROI

Posted by Lou Person on Aug 03, 2011 in Cloud Journey
What ROI is  

  • Return on Investment (ROI)
  • A measurement of costs and expected benefit over time

What ROI is not

  • Total Cost of Ownership (TCO)
  • A measurement of costs only

Types of ROI

Direct ROI: 

  • Easy to see, often listed on financial statements (For example: reduced headcount)
  • No more than half of overall value

Indirect ROI: 

  • Harder to quantify but results in clear competitive advantage (For example: increases in uptime or productivity)
  • A critical driver of business value

How to determine technology ROI
Consider:
The technology to be implemented

  • Most technology delivers both direct and indirect ROI. But exactly how much of each depends on how the technology impact operations; for example:
  • Collaboration technologies typically have more indirect than direct ROI because they typically impact employee productivity.
  • Supply chain technologies typically have more direct than indirect ROI because they have a measurable impact on inventory.

How and where the technology is to be deployed
Similarly:

  • An integration technology typically generates more direct than indirect ROI if used to automate data exchange with customers
  •  An integration platform used primarily for speeding deployment of internal applications typically generates more indirect than direct ROI.  

The state of the existing IT environment
The amount of change a technology triggers when deployed must also be considered; for example: 

  • An automatic timekeeping technology deployed in an environment that relies on a manual timekeeping process will generate significant direct ROI.
  • Deploying an upgraded version of the same technology in the same environment at a later date, however, will result in indirect ROI. 

How long it takes 
One year of data collection is generally sufficient to determine the changes in costs and revenues that drive both direct and indirect ROI. It’s an effort well worth making, as solid data will determine just how effective your IT investment has been.

How common is it?  
According to a recent survey of business process trends [1] only 17 percent of CFOs measure ROI for outsourcing projects.
_______________
[1] “A Survey of Business Process Initiatives,” Nathaniel Palmer, January 2007