Rethinking ROI

Evaluating the potential return on an IT investment can be fairly straightforward--at least in theory. If a CIO shows that a new system will cut costs and pay for itself after a couple of years, or that it will significantly improve efficiency at a reasonable price, business executives usually give the green light. This is especially true of tactical projects, such as applications that cut order-processing costs. But in other cases, IT initiatives have become so important that companies are either not evaluating ROI or they're looking to develop new ways to measure ROI to take into account a project's strategic value. We examine how companies are addressing ROI in four areas:

Electronic business: A sense of urgency is forcing many companies to push ahead with projects without considering ROI. CEOs are less concerned about a dollar return than with enhancing the company's competitive edge, creating a marketing channel, or improving customer satisfaction. Less-strategic initiatives are still subject to stringent ROI calculations, and some companies are beginning to develop new metrics to help them assess the value of all of their E-business projects.

Enterprise resource planning: Many high-priced implementations have escaped the harsh scrutiny of company accountants because the software was needed to replace legacy systems that weren't year 2000 compliant. With Y2K issues resolved, companies are looking at the ROI of their ERP projects and finding that the complexity of the systems and the need for employee training often leads to a negative return over the first five years.

Intranets: Many applications are so inexpensive to develop and deploy that companies often assume they'll get a return on their investments--or they justify these relatively small investments by pointing to intangibles, such as improved employee morale from having easy access to their human resources and 401(k) records, better workforce collaboration, and quicker time to market.

Data warehouses: While they can provide information that leads to reduced costs and higher sales, it's hard to attach a dollar value to the gains data warehouses offer because other processes must be improved to get the benefits. Companies continue to introduce strategic data warehouses--such as those that can identify their most profitable customers--without calculating their potential ROI, but many are looking for a hard-dollar return on data warehouses that help improve operational efficiency.

Regardless of the type of IT project, it's clear that as technology becomes more central to a company's ability to compete, IT and business executives are being forced to rethink their traditional approach to ROI.