Harvard’s Prof. Andrew McAfee says that measuring ROI on IT investments can’t be done. He follows logic proposed by Kaplan and Norton and talks about the difficulty of measuring inside cause-and-effect chains. The logic says that financial impact is not direct but indirect and therefore not capable of direct measurement within the context of business case creation.
Neil Macehiter likes the idea as ‘making sense’ and in comments, Andrew says:
Business and IT have to speak a common language, which means that IT has to learn to ‘speak business.’ I advocate framing the conversation in terms of capabilities delivered by IT. Framing it in terms of whizzy new technologies leaves business people cold, and gets us nowhere.
This is an argument as old as IT itself. The language business understands is underpinned by what FD/CFOs measure. And whether that’s historical, market value or whatever, that’s a language with which many outside the finance department’s office struggle.
Therefore, before shrugging our collective shoulders and resorting to ‘common sense,’ let’s tackle the issue at hand. That, in my view, should be initiated by finance asking questions of the business so they can interpret, negotiate and present figures and values the business understands and is prepared to accept.
Again in comments, Alan Pelz-Sharpe adds:
Frankly I hold by Paul Strassmans work (the Squandered Computer) and simply refuse to do ROI calculations.
Regardless of the difficulties associated with ROI – and there are plenty – I don’t buy these arguments as framed. But then I wouldn’t would I – I’m an accountant by trade, used to assessments based on a single goal – maximising shareholder value.
To me, these are dangerous arguments at best, and foolish at worst. It is the sort of thing IT shops and consultants will jump on as a way of sidestepping accountability. I admit to some prejudice here. I’ve never seen a successful implementation of Kaplan and Norton’s balanced scorecard as an IT project. Maybe I’ve been unlucky. Maybe I’m too picky. The best I’ve seen are dashboards that provide KPIs, an area that’s now being promoted into the mid-range by Sage and others. I have seen cases where claims to benefit simply don’t stand up when put under the spotlight.
I believe the reasons are organisational, characterised by departments that intuitively work as independent operational fiefdoms rather than as interlinking, interdependent units that have a common output and goal. Getting those same organisations to change is a nightmare. Recognising the problems is only one step towards change. Too often, business leaders neither have the determination or focus to make change happen. The Fat Smoker syndrome.
Making a business case has to be more than the Delboy approach of: ‘You know it makes sense’ or the ‘Let’s join the SAP/Oracle/Microsoft/Siebel (fill in your own preferred vendor name) club.’ Andrew says:
Across the hundreds of quantitative IT business cases I’ve seen, I’d estimate that the average ROI figure was about 100%.
I’ve never seen a case yet where those business cases are methodically followed up. Any software vendor I’ve quizzed about this says the companies concerned don’t have the time to do it or there was no resource to go back and measure.
I suspect that using the original business case criteria as the starting point for measurement would reveal severe shortcomings in methodology. Some C-level officers have admitted as much to me in private conversations. Who for example thinks about the risk of failure and the likely cost consequences of major implementations? Who truly examines the potential impact of change management? Are those adequately assessed and added into the business case mix?
Andrew then questions why 100% of business investments are not in IT, given the 100%+ figure.
I never got a satisfactory answer to this question until I read Strategy Maps and saw Kaplan and Norton’s points about how nebulous the numerator— the financial returns— of this ROI figure is, and how the denominator is actually composed not only of IT capital, but also human and organizational capital (what I call the the ’organizational complements‘ of IT).
The reason companies don’t go on an IT investment binge when they see 100+% ROI business cases is that their leaders explicitly or intuitively understand these points. In fact, I think these huge ROI figures are actually counterproductive; they lead to a response of ‘Give me a break.’ Framing IT business cases in terms of costs required to acquire capabilities might lead more often to a much better response: ’Give me some technology.’
Share valuations increasingly represent the intangible value of the way physical assets (people are physical beings so I include them in this definition) are organised, operate, perform and subsequently perceived by the market. Even if you don’t like the share value style benchmark, the fact is you can use it as a starting point to apply both a numerator and develop a denominator. Simply saying (as Kaplan is quoted to have said) “It can’t be done” is, to my mind a poor excuse.
Just because something is difficult or hasn’t been tried doesn’t make it impossible. It just means we’ve not being doing it in a manner that delivers results with which the business as a whole is comfortable.
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