Tough competition and even tighter budgets mean that IT projects must go through a rigorous ROI wringer. And that wringer is getting tougher all the time. Forget on time and on budget, and don't even think about using a vendor's ROI tool. The smartest companies are measuring a complex mix of business objectives, costs, and risks, and holding managers accountable for results that maximize returns.
"It used to be the 'ta-da' strategy," said John Howell, VP and program director of Internet solutions for Citibank Global Securities Services. "We'd put the project together and throw it out there and say, 'Ta-da! It must be successful.' We didn't look to maximize ROI, we looked to measure it."
Citibank Global Securities Services has moved beyond the easy approach to ROI with a methodology that looks to maximize returns, Howell said. The new frontier is "more acuity in computing ROI," said Howard Rubin, a principal at Meta Group. Companies categorize IT initiatives by specific goals, such as raising the stock price, increasing market share, or lowering operating costs, then use historical and other data to quantify what returns can be expected. "IT departments need to look at the big picture," said Calvin Braunstein, president and executive research director at advisory firm Robert Frances Group. They're also tightening the links between IT investment and its impact on a company's sales and profit. Spending should go up only when revenue is headed in the same direction or costs are going down. "It has to impact either the top or bottom line," Braunstein said.
Still, only a few companies are using broader definitions of ROI. About 8% of all businesses examine IT investments through these more complex valuation filters, Rubin said. And those that are doing so use a variety of methodologies.
Citibank Global Securities has made the transition away from the "ta-da" strategy to a more comprehensive approach to assessing the potential returns on IT projects. The company, which sells stocks and bonds to institutional investors, is building an executive portal that will let it act as a central information source and value-added service provider for C-level executives at the 350 largest financial institutions in the world. Having such a small target market leaves little room for error. One lost customer for the division is equivalent to a global retailer losing a million consumers. But the potential for gains is also huge: If the portal wins favor, Citibank's market share should increase, and it will be positioned to sell other products to this elite group, Howell said.
Howell's group built a valuation model that examined every aspect of the business to determine the best strategy for developing, implementing, and selling the portal, working with people in various lines of business to ensure that each step of the project would succeed. The goal wasn't just to come up with an ROI calculation on the project, but to design a game plan for the highest degree of success.
The biggest success factors were price and client adoption, Howell said. And Citibank wanted to get it right the first time. If it charged too little initially, customers might balk later at a price hike. But charging too much could put off potential customers. "The strategy we took was to ensure we could get the most value out of the client, maximize the money, and minimize how much we left on the table," he said.
Instead of simply weighing the costs of the implementation from an IT perspective, Howell's group worked with marketing to determine what recruitment efforts would be most effective with the target customers. "Historically, would we have put that much weight on marketing? Maybe," Howell said. But only subjectively and only at senior management's urging if they thought it might be a driver in the project's success, he says.
Toward the end of the project-valuation effort, Citibank called on a startup consulting firm to verify the predicted returns. iValue looks at shareholder value to assess ROI, using the same formulas that Wall Street analysts rely on to value companies. It builds economic simulations of IT projects that quantify things such as the demands they will place on a company's IT systems and architecture, other costs, and soft measures of success such as customer loyalty and adoption rates. Those are put into a cause-and-effect formula that traces the project's impact all the way out to its effect on the company's stock price.
The simulation can be tested by changing the cost components or demand parameters to determine what aspects will influence the project's economic performance, said Chris Gardner, who co-founded 6-month-old iValue. "Then we can make better decisions, guide development efforts, and establish priorities," he says.
iValue's simulations agreed with most of the results from Citibank's in-house valuation model. "We had to change some things in regards to how we were going to amortize the software costs," Howell said. Citibank plans to use the valuation model to evaluate future IT projects, and it hopes to cut the time needed to analyze a project to about seven weeks from the four months Howell's team spent on the portal. iValue will start selling its applications next month for businesses to create their own valuation models.
There aren't always hard numbers with which to quantify a lot of the intangible outcomes that companies look for when they implement an IT initiative, so a speculative model based on historic data is the answer, Meta's Rubin said. For instance, retention rates are a good measure of customer loyalty. A company looking to purchase loyalty-enhancing tools should build a model that correlates percentage change in customer loyalty with business goals. The models for developing these calculations need to be in place for all projects, Rubin said, so there's consistency in the decision-making process across the company.
For a complete version of this article, please visit www.informationweek.com