When a Project's ROI Can't Be PinpointedBy Baselinemag | Posted 2002-03-18 Email Print
"What's the return?" is a common question. Must the answer always be stated in numbers?
We spend a lot of time at Baseline thinking about the business casethe often-sensible requirement that technology initiatives must be demonstrable winners, paying for themselves by returning more cash than they consume.
These sorts of analyses not only let companies choose among technology initiatives, they put such initiatives on an even footing with other potential investments (the acquisition of new plant equipment, say, or a stock buyback program), and thus give companies a way of choosing between them.
But not all technology-investment questions can be answered by a spreadsheet that subtracts near-term costs from benefits. Some undertakings are too complex for that. And it's when this truism gets ignoredmainly by business executives who control budgets but also by risk-averse technologists wary of anything that doesn't produce a short-term paybackthat companies stand pat and risk their future.
Quickly grasping the factors needed to evaluate an initiative is one of a technology executive's essential abilitieson a par, arguably, with having a fundamental understanding of business, or with being able to attract and retain staff. With this in mind, I refer readers to a fresh perspective on the limits of business-case methodology articulated in a recent article in Sloan Management Review, the quarterly journal from MIT's graduate school of business. The article, titled "New Approaches to IT Investment," doesn't actually argue that business-case reasoning is passé as a filter for IT investments. But it does urge IT executives to resist using numbers where they're not relevantor knowable.
"We're not saying business cases don't make sense," one of the article's authors, Cynthia Beath, told me recently. "We're saying they don't cover the waterfront. It hardly seems fair to force people to pick a number out of a hat to justify a long-term strategic decision."
In particular, Beath, a professor of information systems at the University of Texas at Austin, and her co-author Jeanne Ross, principal research scientist at Sloan, rail against the use of cost/benefit analyses to justify what they call transformation initiativesinitiatives that enable companies to fundamentally alter their business processes for the better. Transforming a network to TCP/IP, building data warehouses, or deploying enterprise resource planning (ERP) are all examplesand trying to divine all the costs and benefits of such projects in advance is an exercise akin to "nailing jelly to a wall," Beath says.
"I feel for companies that thought their ERP system would cost $30 million and it was $100 million," Beath adds. "That's devastating. But would those companies not have done their ERP system if somebody had presented them with the total bill in advance? Or did they need to do it to survive?" (A note to any CIO halfway through a runaway ERP project planning to highlight this quote and show it to the boss: Doing ERP isn't a sign of wisdom in and of itself. Read "Blame Game," Case Study Writer Kim Girard's account of an ERP project gone haywire.)
The business case does remain useful for deciding whether to green-light a specific process-improvement or renewal efforttwo categories outside of transformation that the authors identify in their framework. An example of a process-improvement might be getting a sales force to do its ordering electronically instead of on paper (see Baseline, October 2001, "Online Order"); a renewal effort might involve upgrading 20,000 employees to XP from Windows 98. Those are the kinds of things where the costs and benefits are calculable. They are also not strategicat least not in the sense of being things a CEO would personally spend her time on. And in the end, that may be one of the unspoken, and ironic, implications of Beath's and Ross's research: If you're heading into a meeting with the CEO, leave the ROI slides in your office. Have the courage to say, "Of course this is about money. And yes, I've thought through some of the costs and risks. But it's first and foremost about how we create new opportunities for ourselves. Let me start there..."