The Effective CIO

Is There An ROI For ROI? February 25, 2008

One of the mantras for effective IT management is ROI: computing the Return On Investment for a proposed IT project. If the ROI shows that the investment can be recovered in some reasonable timeframe, the project is approved.

This kind of analysis works well for tangible projects in which the return and the investment are both equally measurable. If you are replacing one piece of hardware with another, or renegotiating a service contract at a fixed price, ROI can be very helpful as part of your decision process.

In general, you can easily compute the “I” of any project. Hardware, software, service, support, consultant fees, travel costs, employee salaries: these are all easily measured and tracked.

Unfortunately, many IT projects yield an important return that is completely subjective. How do you measure the “return” on an effective disaster recovery plan? How about license compliance or endpoint security systems? In general, any project whose end result is the avoidance of an undesirable situation cannot be evaluated using ROI. Hopefully, the rest of your management team probably agrees with this and won’t ask you to try.

Other projects are more fuzzy. Projects that yield efficiency or process improvements are often subjected to misguided ROI analysis in an effort to numerically justify an essentially intangible project.

I once consulted with a firm that justified an internal portal on the grounds that implementing an internal search engine would save (literally) millions of dollars. The reasoning went like this: if every employee searches for a document once a day, and each search is just one minute faster than the old manual method, and there are 50,000 employees in the company, you can save 50,000 employee-minutes a day, or about 833 employee hours, or about 104 days of effort each day across the company. At an average salary of $20/hour, you are saving $16,640 each and every working day! With 250 working days each year, you’ll be banking $4,160,000 every year! They argued that this was actually quite low, since they really expected searches to save more than a minute each, and their average salary didn’t include benefits. They really did all this with a straight face and a big PowerPoint presentation.

I asked if they would be receiving an actual check for $4 million each year. They looked at me blankly. I asked again how they expected to account for this enormous amount of money each year. Again, blank stares. It was clear I didn’t understand their methodology (and wasn’t drinking their Kool-Aid). I stopped asking and kept working on the system.

In general, if you are attempting to do an ROI analysis, and you find yourself factoring in average salaries, or total employee time, or some similar item, just stop. The only time you can use salaries and people is if you can count the number you will be laying off as a result of the project. Headcount reduction counts toward ROI; headcount repurposing does not.

The reality of being a CIO is that we often need to assess and greenlight projects based on intuition, good business sense, and the ability to manage risk and reward. Many projects will improve employee efficiency and give time back to be used for other business purposes. Workflow, collaboration, communication, sharing: they all make a huge difference in our businesses. IT is a key enabler of all these things. They yield intangible benefits with a real impact on your business. Don’t diminish them by trying to reduce them to a simple number. The real value of these things is truly immeasurable and the benefit to your business five years from now is completely unimaginable.

Bottom line: stop looking for numbers where they don’t exist, and start unlocking value wherever you find it.