ROI is not a formula, it is a responsibility

ROI IS NOT A FORMULA,
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IT IS A RESPONSIBILITY
Setting IT priorities based
TRADE PUBLICATIONS, MARKETING BROCHURES, AND ANALYST
reports devote excessive amount of ink to helping business leaders calculate
on return on investment is
IT’s return on investment. Methods recommended include simple cost-benefit
a fool’s game.
analysis, internal rate of return, discounted cash flows, total cost of ownership,
earned value added, and real options. Among all this mumbo-jumbo of numbers
and formulas, one loses track of the most important factor that will ensure
“returns” on your investments, that is, accountability.
Basing IT priorities on ROI rankings is a fool’s game, a game in which the
Jacob Varghese
biggest liar wins. By relying solely on ROI figures to approve a project or decide
between projects, managers are shirking their responsibility for understanding
how technology will affect their businesses. ROI numbers do not ensure that
technology initiatives will be in line with business strategy. The success of any
technology initiative depends on whether the person responsible for imple-
mentation has the required incentives, authority, and credibility across the span
of the organization that would be affected by that initiative. ROI figures should
merely be used as a means to ensure that the planning is as comprehensive as
possible and the totality of impact has been considered. And managers should
avoid approving the entire funding up front. Rather, funding should be an ongo-
ing contingent upon the project team meeting key milestones and realization of
planned benefits.
Managers involved in deciding on IT investments will have to look beyond
ROI numbers to ensure that their organizations get a “return” on their invest-
ments. To do so, enterprises will have to
bridge the business-IT divide
establish responsibility for “return” on investment
implement risk management processes into project management
Bridging the Business-IT Divide
The constantly changing competitive landscape makes strategy a moving target
that is increasing the divide between business executives and technologists.
While the business side focused on coping with change, it has left the critical
responsibility of aligning business strategy and IT solely to MIS departments.
In today’s world, where business leadership is increasingly technology-driven,
this relationship has to change.
Journal of Business Strategy 21

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SPECIAL FOCUS
Process Improvements: The end objective of IT
Figure 1: The Dimensions of
investments that focus on short-term profitability or
incremental process improvements might be to speed
IT Investments
time to market, lower the cost of operations, or to differ-
entiate services/product offerings. The ownership of such
investments should lie with the business unit head, func-
Renewal
Transformational
Shared
tional head, or the process owner, depending on how the
Infrastructure
Owner: CIO
Owner: CEO
organization is structured.
Experiments: New technological trends that present
Process
Improvements
Experiments
Business
significant opportunities for long-term growth should be
Solution
Owner: Business Unit
Owner: R&D
the focus of IT experiments that use pilot programs to
Head / Functional Head
validate the technology’s promise and impact. There is no
fixed home for these projects. In one the industry, they
Short-Term Profitability
Long-Term Growth
might reside within the R&D organizations, in another,
the enterprise architecture teams of MIS departments
might take responsibility.
The responsibility chart in Figure 2 establishes who in
Business users of IT must play a key role translating
the organization should own IT investments in each cat-
business strategy into technology requirements and also
egory, from conception to implementation. Splitting IT
make the effort to understand how emerging technologies
investments into these categories ensures funding for
will affect their businesses. The first step toward this
deserving but relatively low priority projects that other-
transition is for business users to take responsibility for IT
wise might not have been approved. In contrast, with a
investments that will touch their operations, instead of
single-size-fits-all-ROI-formula-driven approach, trans-
delegating them to their MIS departments. CIOs and IT
formational projects would always get sidelined because
managers are critical but they can only be partners with
no single business unit or IT department could justify the
those responsible for planning and executing strategy.
investment cost.
The distribution of IT budget across these four cate-
Establishing Responsibility
gories is driven by strategic imperatives, and business
In “New Approaches to IT Investment,” Jeanne W. Ross
life cycle stage. Figure 3 illustrates how the budget dis-
and Cynthia M. Beath break all IT investments along two
tribution across the four categories could vary across the
dimensions: (1) strategic objectives (short-term prof-
typical S-shaped business life cycle. Most of the invest-
itability vs. long-term growth) and (2) technological
ments in transformational projects would be made in the
scope (shared infrastructure vs. business solutions). (The
initial phase, as the business ramps up to the first strate-
dimensions are illustrated in Figure 1.) Based on those
gic inflection point. As the transformational projects
two dimensions, all IT investments can be broken into
one of the following four categories:
Transformational: IT investments that aim to
Given the organization-wide impact and
remove the infrastructural barriers to long-term growth
across the organization (for example, integrated CRM,
the imperative that transformational IT
enterprise information portals, or end-to-end processing).
investments must be in line with
Given the organization-wide impact and the imperative
that such investments must be in line with organizational
organizational strategy, the CEO must
strategy, the CEO must own these investment decisions.
The success of these projects should be his responsibility.
own these investment decisions.
Renewal: The aim of renewal IT investments (such as
legacy modernization and platform conversion) is to
improve the service levels of the existing shared infra-
near implementation, the process improvement projects
structure or reduce the cost of support and maintenance.
would kick in to meet the increasing competition.
The ownership of such projects should lie with the CIO,
Thereafter, each business unit would invest in renewal
since the boundaries of these projects are well defined
projects, if their managers believe extra profits can be
and benefits accrued can be quantified up front.
squeezed from the systems. Meanwhile, the organization
Moreover, it is the CIO’s responsibility to ensure the ser-
is investing a constant number of experimental projects
vice levels from the shared IT infrastructure are con-
to ensure that the business is keeping pace with chang-
stantly improved.
ing technology.
22 May/June 2003

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Implementing Effective
Risk Management Processes
Figure 3: Budget Distribution
After firms have crossed the first two most difficult hur-
dles (bridging the business-IT divide and thereby estab-
lishing the responsibility, and ensuring that the IT invest-
Inflection
ments are in line with business realities), the chosen pro-
Point
jects must be executed flawlessly. This takes effective
project management processes. A key component of
Revenues
effective project management processes is risk manage-
ment. To manage risks:
Inflection
Point
Establish a cross-functional team comprised of rep-
resentatives of all stakeholders. Empower these
teams and foster a sense of urgency.
Provide a mechanism for making a business deci-
Experiments
sion (go, no-go, change direction) on each project
IT Spends
Process Improveme
milestone. This mechanism should be under close
nts
Transformational
Renewal
supervision of the responsible person identified
above. These milestones are standard, measurable
checkpoints. They establish mandates that define
next-phase targets as well as boundaries for con-
ducting interim reviews. These reviews should
ensure forward-looking focus on business viability
ROI is increasingly becoming a fact of business life,
Allocate resources to approved projects that are
where CEOs, CFOs, and everybody in between insist on
consistent with business priorities and maintain
demand-supply balance between key resources
across the pipeline of projects.
New technological trends that present
significant opportunities for long-term growth
Figure 2: Responsibility Chart
should be the focus of IT experiments that use
pilot programs to validate the technology’s
promise and impact.
CEO
Responsible for Transformational
IT Investments
hard ROI numbers. However, any of the various methods
for computing ROI can at best be rough approximations;
CIO
they should never be used to set priorities for technology
Responsible for Renewal IT
investments, except for the obvious extremes. Those pri-
Investments
orities must directly link to business strategy. Therefore,
responsibility for IT investments must not be the sole
province of the MIS department.
Business Unit Head / Functional
The need for IT people to understand business strate-
Responsible for Process
gy has been beaten to death; today’s imperative is for
Improvement IT Investments
business people to understand the implications of tech-
nology for their business. u
R&D
Jacob Varghese (jacobv@umich.edu) is a consultant
Responsible for Experimental
with SETLabs (Software Engineering and Technology
IT Investments
Labs) in Infosys Technologies Ltd. Jacob’s work has
focused on enterprise IT issues, technology manage-
ment, and supply chain management.
Journal of Business Strategy 23

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