The ROI is the ROIExcept When It's NotBy Peter Edmonston | Posted 2002-07-10 Email Print
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Financial math trips up many a technology manager. Luckily, it's not all your fault. Read on to discover a variety of means for determining return on investment (ROI) for your projects.How could three little letters cause so much confusion?
Most executives know that ROI, or return on investment, is the dollars-and-cents payoff of a project. Calculating ROI for technology initiatives is a fairly recent development, but one that has fast become a requirement since the dustup over Internet valuations.
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But bringing ROI analysis to technology is not easy. Part of the difficulty lies with the underlying numbers. Technology managers often underestimate the costs of maintaining software, for example, and a frequent gripe about enterprise applications is that benefitssuch as happier customerscannot be equated with dollars. The result? ROI figures that are, to put it kindly, creative.
Another major source of ROI-related angst is the surprising range of opinions about how to calculate it, even within the financial community. The basic concept behind ROI is simple: the net benefits of a project divided by the costs, expressed as a percentage. But within that definition, there is a lot of room for interpretation.
Technology vendors have only added to the muddle by introducing custom-made techniques that tend to flatter their own products. "There are an awful lot of people out there doing a lot of things to make the numbers look good," says Rebecca Wettemann, research director at Nucleus Research in Wellesley, Mass. (See Metrics Marketing, Baseline, May 2002.)
When justifying your next project, you will find it pays to know your way around an ROI analysis. The chart on the next page shows you some common formulas, and where they come up short.