ROI, ReconsideredBy Jeff Thull | Posted 2010-12-21 Print
How can CIOs optimize the value achieved through critical IT investments?
The purpose of any business investment is to deliver net economic value. Yet, research has shown that in more than 60 percent of IT implementations, the value expected or “promised” is not being received. So the critical question is, “How can CIOs optimize the value achieved through critical IT investments?”
The answer is to calculate value by going beyond traditional ROI measurements to achieve a more holistic approach. That would include the following:
• The first and best-understood perspective of value is the product viewpoint. This considers the physical attributes (processing speed, accuracy, durability, availability, etc.) of the IT solution. The product level of value is the easiest to determine but provides the least amount of differentiation among suppliers. It is typically calculated by the vendor in its ROI model and is comparable among vendors. It can be thought of as “generic value.”
• The second perspective is the process viewpoint. When the solution is implemented, it has an impact on the way a process is performed, and thus the inputs, costs and outcomes of that process come into play. Many vendors consider and calculate the impact only on the processes directly, but they do not consider the related impact on processes upstream and downstream.
• The third perspective considers the strategic impact—an impact on multiple processes, affecting their ability to carry out key strategies. An example would be a document management and collaboration system. When evaluated in a vertical such as pharmaceutical manufacturing, a key process that’s affected is the organization’s response to Food and Drug Administration queries during the drug-approval process. This process requires a cross-functional review and response, thereby having a considerable impact on labor and time savings. The net result of this system is the ability to route a new drug through the FDA approval process faster and bring the drug to market sooner.
Few, if any, vendors will provide helpful insights into strategic value perspective, so customers will have to interpret strategic value on their own. However, a progressive solution provider will provide valuable insights and support at the strategic level.
The scale of the economic value across these three perspectives is dramatic. In the above example, at the product level, a $3.5 million solution investment provided $3 million in savings in areas such as storage costs, access time and hardware maintenance. This is an attractive 86 percent ROI.
The process level impact was calculated to be $12 million, but bringing a new drug to market sooner created a $364 million impact. That is the true potential value of the solution and the realistic target.
Know the Net Economic Impact
Vendors must be prepared to calculate the net profit that could potentially be available to their customers from using their solutions. It’s the only effective way of communicating the usefulness and true potential value of their proposed solutions.
CIOs need to start in a different place. Calculating the potential value of an IT solution raises an important question: “How do you know what you need in the first place? Are you pursuing solutions, or are solutions pursuing you?”
CIOs should always consider four critical components of net economic impact:
1. Baseline performance: How much net profit is the IT function currently delivering?
2. Requirements: How much additional net profit could be created through the effective use of IT in the business?
3. Capabilities: To what degree is the potential solution capable of delivering the additional net profit?
4. Constraints: What elements in the organization will prevent or dilute its ability to achieve the required value?
Knowing the answer to the first question is essential to understanding whether the IT ROI is running at an acceptable level and how credible the IT function of the solution is. The second question highlights and quantifies performance gaps across the enterprise. Even more important, it creates an “inside out” approach to developing solutions and achieving value by defining the substantial process and performance requirements—rather than solution capabilities—that are required to close the gap.
Answering the third question allows CIOs to accurately determine the chances of solution success. Finally, the last question helps CIOs ensure that all potential constraints to success will be addressed, leading to optimal value for the organization.
By considering the product, process and performance perspectives of value, CIOs can determine the true economic value required by their organization. They can then evaluate the capabilities of various vendor solutions, along with the capabilities of the affected functions in their organization, to optimize the value impact of a given implementation.
Jeff Thull is president and CEO of Prime Resource Group and the author of Mastering the Complex Sale, Second Edition.
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