ROI faulty as measurement of IT success – survey
Sums don't always add up properly
Return on investment (ROI) is no longer seen as a key indicator of what does and what does not make technology investments work, a poll of 400 IT and financial directors in the UK has shown.
The Unisys-sponsored research showed that there is still a significant job to be done in business to first identify and then understand how the contribution and success of technology to the business is best evaluated. Brian Hadfield. MD of Unisys UK told ComputerWire that ROI is best viewed as a "trailing indicator."
As so few IT implementations carry out a post-implementation review the numbers used to measure ROI will always be sketchy at best. ROI is the net average cash flow of an IT project expressed as a percentage of the initial investment. Intuitively, it makes sense to many people who use it as a form of "interest rate" to see if the investment is a sound one.
But ROI fails to discount cash flows to take account of any risk or variation in the timing of financial costs and returns. This can make for a flaw when it is used to assess IT projects where the costs or benefits vary from year to year. The measures can also be particularly difficult to estimate in technology projects, where the positive cash flows based on increased revenue or cost avoidance are usually achieved by business functions one stage removed from IT.
The survey suggests a high level of dissatisfaction around the measures currently used to reflect the value of IT to the business, both from a financial and IT management perspective. Hadfield said a "leading indicator" is required, something that can be expressed as a measure of business value delivered at key milestones of an IT investment. This would improve project scope, provide better buy-in and produce better results than if IT projects are measured on direct costs alone.
Executives polled for the survey see value in the ability of IT to increase customer satisfaction, improve information access or allow better knowledge sharing. Innovation, improved revenue and reduced costs were not seen as being closely tied to the IT function, however, turning on its head the belief that technology is best sold on the promise of reduced costs or improved revenue.
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