ROI for technology projects : measuring and delivering value

361 Pages·2008·1.346 MB·English

by  D Brian Roulstone, Jack J Phillips

ROI FOR TECHNOLOGY
PROJECTS
Measuring and Delivering Value
D. BRIAN ROULSTONE
JACK J. PHILLIPS
AMSTERDAM (cid:129) BOSTON (cid:129) HEIDELBERG (cid:129) LONDON
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Contents
Preface, ix
Acknowledgments, xvi
About the Authors, xviii
1 Measuring the Return on Investment for Technology
Initiatives: Trends and Issues, 1
ROI Progress and Status, 3
Why ROI?, 9
ROI Concerns, 14
Barriers to ROI Methodology Implementation, 20
Benefi ts of the ROI Methodology, 22
ROI Best Practices, 23
Final Thoughts, 27
References, 28
2 The ROI Model: History and Background, 29
Building the ROI Methodology, 29
An Evaluation Framework, 31
The ROI Model, 34
Operating Standards and Philosophy, 48
Implementation Issues, 49
Application and Practice, 49
Final Thoughts, 50
References, 50
3 Establishing the Need for the Technology Project, 51
Pinning Down the Details: Project Requirements, 51
Levels of Objectives for Solutions, 55
The Importance of Specifi c Objectives, 60
v
vi Contents
How Is It All Connected? Linking Evaluation with
Needs, 60
Planning for Measurement and Evaluation, 65
Final Thoughts, 71
4 Collecting Data, 73
Sources of Data, 73
Questionnaires and Surveys, 75
Tests, 93
Interviews, 98
Focus Groups, 100
Observations, 101
Business Performance Monitoring, 104
Action Planning and Follow-Up Assignments, 107
Performance Contracts, 116
Selecting the Appropriate Method, 118
Data Tabulation Issue, 121
Final Thoughts, 123
References, 123
5 Isolating the Effects of Strategic Technology
Investments, 125
Preliminary Issues, 125
Use of Control Groups, 130
Trend Line Analysis, 135
Forecasting Methods, 138
Participant Estimate of IT’s Impact, 140
Supervisor Estimate of IT’s Impact, 150
Management Estimate of IT’s Impact, 152
Customer Input of IT’s Impact, 152
Expert Estimation of IT’s Impact, 153
Calculating the Impact of Other Factors, 153
Using the Techniques, 154
Final Thoughts, 155
References, 156
6 Exposing the Value of Strategic Technology Projects, 157
Preliminary Issues, 157
Techniques for Converting Data to Monetary Values, 161
Converting Output Data to Contribution, 162
Calculating the Cost of Quality, 165
Converting Employee Time, 166
Contents vii
Using Historical Costs, 167
Using Internal and External Experts’ Input, 168
Using Values from External Databases, 169
Using Estimates from Participants, 169
Using Estimates from Supervisors and Managers, 170
Linking with Other Measures, 172
Using IT Staff Estimates, 174
Selecting the Appropriate Technique, 174
Accuracy and Credibility of Data, 175
Final Thoughts, 179
Case Study:
Staggering ROI Results for a Successful Customer
Relationship Management (CRM) Implementation, 180
References, 182
7 Tabulating Project Costs, 183
Cost Strategies, 183
Cost Tracking Issues, 188
Major Cost Categories, 190
Cost Accumulation and Estimation, 197
Final Thoughts, 202
References, 202
8 Calculating the Return, 203
Basic Issues, 203
ROI Interpretation, 206
Case Application, 214
Other ROI Measures, 218
Consequences of Not Investing in IT, 220
ROI, the Profi t Center, and EVA, 221
ROI Issues, 223
Final Thoughts, 229
References, 230
9 Identifying Intangible Measures, 231
Key Issues, 231
Typical Intangible Measures, 238
Final Thoughts, 245
References, 246
viii Contents
10 ROI Forecasting, 247
Why Forecast ROI?, 247
The Tradeoffs of Forecasting, 249
Forecasting/Estimating Performance Improvement, 253
Case Example, 254
Forecasting with a Pilot Project, 257
Forecasting ROI with Reaction Data, 257
Forecasting ROI with Knowledge Data, 260
Forecasting ROI with Skills and Competencies, 263
Forecasting Guidelines, 264
Final Thoughts, 266
References, 267
11 Communicating Results, 268
The Importance of Communication, 268
Principles of Communicating Results, 270
Analyzing the Need for Communication, 272
Planning the Communication, 274
Selecting the Audience for Communications, 277
Developing the Information: The Impact Study, 280
Selecting the Communication Media, 283
Communicating the Information, 289
Analyzing Reactions to Communication, 296
Final Thoughts, 297
Reference, 297
12 Implementing the ROI Methodology, 298
Overcoming the Resistance to ROI, 298
Planning the Implementation, 300
Preparing the IT Staff, 312
Initiating the ROI Process, 316
Preparing the Management Team, 318
Monitoring Progress and Communicating Results, 323
Cost Saving Approaches, 324
Final Thoughts, 327
References, 328
Appendix, 329
Index, 337
Preface
ROI is Exploding
Calculating the return on investment (ROI) has become one of the
most challenging and intriguing issues facing the information tech-
nology (IT) sector. The interest in ROI evaluation has been pheno-
menal, with the topic appearing on almost every IT conference and
convention agenda and articles regularly featured in CIO Magazine
and research journals. Several books have been written on the topic,
and consulting fi rms have been formed just to tackle this important
issue.
Several factors are driving this increased interest in ROI. Probably
the most infl uential factor is the pressure from clients and senior
managers to show the return on their IT investment. Competitive
economic pressures are causing intense scrutiny of all expenditures,
including IT and technology-focused product development costs.
Total quality management, reengineering, and Six Sigma have created
a renewed interest in measurement and evaluation, including weigh-
ing the effectiveness of IT. The general trend toward accountability
with all staff support groups is causing some IT departments to
measure their contributions. These and other drivers have created an
unprecedented wave of applying the ROI process.
An Effective ROI Methodology
The challenging aspect of ROI analysis is the nature and accuracy
of its development. The process often seems confusing, surrounded
as it is by models, formulas, and statistics that frighten even the
most capable practitioners. Coupled with this concern are the mis-
understandings about the process and the gross misuse of ROI
techniques in some organizations. These issues sometimes leave
practitioners with a distaste for ROI evaluations. Unfortunately,
ix
x Preface
ROI cannot be ignored. To admit to clients and senior managers
that the impact of IT or technology cannot be measured is to admit
that IT does not add value or that IT investments should not be
subjected to accountability requirements. In practice, ROI analysis
must be explored, considered, and ultimately implemented in most
organizations.
What is needed is a rational, logical approach that can be simpli-
fi ed and implemented within the current budget constraints and
resources of the organization. This book presents a proven ROI
Methodology based on almost 20 years of development and improve-
ment. It is a process that is rich in tradition and refi ned to meet the
demands facing IT and technology development projects.
The ROI Methodology described in this book meets the require-
ments of three important groups. First, the practitioners who have
used this model and have implemented the ROI process in their
organizations continue to report their satisfaction with the method-
ology and the success it has achieved. The ROI Methodology pre-
sented here is user-friendly, easy to understand, and has been proven
to pay for itself time and time again. A second important group is
the clients and senior managers who must approve IT and technology
development budgets. They want measurable results, preferably
expressed as a return on investment. The ROI Methodology pre-
sented in this book has fared well with these groups. Senior managers
view the process as credible, logical, practical, and easy to under-
stand from their perspectives. More important, it has their buy-in,
which is critical for securing future support. The third important
group is the evaluation researchers who develop, explore, and analyze
new processes and techniques. When exposed to this methodology
in a two-day or one-week workshop, the researchers, without excep-
tion, gave this process high praise. They often applaud the techniques
for isolating the effects of IT and the techniques for converting data
to monetary values. Unanimously, they characterize the process as
an important—and needed—contribution to the fi eld.
Why Write this Book Now?
This book—the fi rst of its kind—focuses on ROI analysis for
technology investments and is written for technology decision makers
by a technology executive and a foremost authority on the discipline
of return on investment. This book leverages the talents of both
authors to provide a framework and method that can ensure greater
success in mobilizing technology initiatives. No other book on the
Preface xi
market specifi cally addresses the critical need to prove ROI on
resource-intensive technology projects with a time-tested and
industry-leading process. To date, most ROI books have focused
on the areas of performance, training, marketing, and other human
capital related disciplines, but the need for ROI evaluation in other
areas is growing.
With increased scrutiny of technology spending by the most
complex organizations in the world, technology leaders need a tool
to help them prepare for hard-hitting discussions with their organi-
zations’ CFO, president, CEO, or chairman about the return they
should expect from critical technology projects. Rather than focus-
ing top managers’ attention on cutting, challenging, and controlling
expenditures (as many C-level accountants prefer), this approach
guides technology managers in providing executives with more com-
prehensive, balanced information that helps all involved make better
business decisions. Along the way, technology managers get help
communicating more effectively with the fi nancial decision makers
within their organizations. The book also shows executives how
partnering with IT leaders can help them and other managers under-
stand the return these technology projects can provide to their
organizations in increased human effi ciency, automation of manual
processes, unifi ed organizational data, and other high-return results
from complex and critical technology initiatives.
At the same time, executives and IT professionals must have their
projects measured with balanced perspectives. While the ROI itself
is important, capturing intangible benefi ts related to the project and
information about the application and implementation of the project
is important, as well. Even earlier in the cycle, gathering reaction to
the technology and the extent to which individuals have learned the
technology is crucial. Together, these data sets represent a balanced
profi le of success, with ROI at the pinnacle.
What this Book Covers
This is the fi rst book to present the ROI Methodology for technol-
ogy. This methodology generates six measures of the values of tech-
nology projects:
1. Reaction and perceived value
2. Learning and confi dence
3. Application and implementation
xii Preface
4. Impact and consequences
5. Return on investment
6. Intangible Benefi ts
In addition, this methodology always has a process in place to
isolate the effects of the technology solution from other solutions
and factors, another critical element to ensure the credibility of the
IT project’s evaluation. All this is presented in a logical, systematic
way, with specifi c standards that provide guidelines and rules for
collecting data, analyzing data, and reporting results. These provide
the consistency and credibility needed to secure management’s buy-in
of the process.
The book concludes with chapters on ROI forecasting—a critical
tool for determining the value of projects before implementation,
ways to communicate the data to stakeholders, and methods for
implementing and sustaining the process.
Who should Read this Book
This book is written primarily for managers and executives who
are charged with mobilizing and executing key technology projects
and initiatives within their organizations. It is also for anyone in busi-
ness who is concerned about the value of technology-focused projects,
programs, processes, and resources. Although executives are often
committed to these projects, they need to see the value in terms that
they can appreciate and understand—monetary value and ROI.
This book is also designed for technology consultants, business
analysts, and practitioners who are responsible for scoping, design-
ing, and implementing key technology initiatives within organiza-
tions. The book represents a source of basic research techniques,
applications, experiences, and resources available to expose the value
of key technology initiatives.
Functional Areas
Designed for a spectrum of functional areas within an organiza-
tion, outside the obvious IT function, professionals in the following
areas represent the audience for this book:
1. IT management
2. IT planning
3. IT implementation