I didn’t realise until a couple of days after but my last post about ROI was one of a number that picked up the meme. Rather than go through them, here’s the links: Thomas Otter, Vinnie Mirchandani, JP Rangaswami
In the previous post, I had suggested some measure based on stock market valuation as a starting point. Thomas suggested looking at Paul Strassmann’s thoughts on the valuation of employees as part of the equation for figuring return on investments. This was helpful but despite his reputation, Strassmann’s thinking is flawed.
In Strassmann’s argument, the whole of the excess of a stock valuation over physical assets is attributed to intellectual capital. This is not true. Sentiment, general economic conditions, the extent to which the CEO gave a good performance at the last analyst meeting (among other factors) all contribute towards a stock price. These were factors that weighed in discussions Juergen Daum was having in 1992.
This topic is important because of the continuing battle for funding and justifying IT investments. This matters at every level of business, from the smallest to the largest because the use of IT has become a critical determinant in business success. You simply could not run BP, GE, BA, Tesco or a myriad other companies and expect to see the same level of efficiency without IT investments. Even the corner shop – if it exists – cannot prosper without paying attention to daily or weekly cashflow.
At the low end, business survival is a critical issue since so many VSBs go out of business in their early stage development. It is one of the chief motivating factors behind Winweb‘s offering. In the mid-range, Jyoti Banerjee notes that UK: IT stinks, citing UK’s failure to invest appropriately as a major reason why the UKs economic performance in this sector lags that of our American cousins. Vinnie goes after the big vendors on the grounds of cost. I’m with Vinnie on the particular but I believe there is a value element that needs taking into account when thinking about cost. Especially when SAP pumps out case studies where customers are talking 100%+ ROI.
Then today, Jeremy Ballenger approached me to critique a study proposal about the business ROI of blogging in the enterprise. Contrary to what others might say, setting up blogs in any business is just another IT project but with an obvious human dimension.
Looking back over the literature and having revisited what Andrew McAfee had to say earlier I’ve concluded the following as a tentative way forward of developing an ROI scenario for any IT project, except perhaps distress purchases. Note, this is not designed to be a formula but an attempt at recognising the factors that influence the construction of formulae. This is a work in progress so feel free to critique.
- There is no generally agreed framework that conforms to any accepted accounting practice for measurement. However, measures are almost always reduced to a currency value. And like it or not, that has to be the aim.
- Andrew’s argument about dialogue and language is critical. This is not an either or, he, she, they argument. It is an US discussion. I am personally tired of listening to people denigrate CIOs as glorified IT managers. Equally, I think it’s patronising to refer to CFOs as overpaid bean counters. We need therefore to develop a folksonomy that allows interested parties to communicate transparently with one another.
- There needs to be a general recognition of Lovaglia’s Law: The more important the outcome of a decision, the more people will resist using evidence to make it. Therefore, bottom up buy in to the discussion is much more important than top down dictats.
- A recognition that IT impacts people. And it is people who execute business critical processes. In the small firm, that might be the ability to collect debt. In the large organisation, it might be the ability to hedge currency fluctuations.
- A genuine appreciation that today’s IT is no longer a matter of making silo’d decisions. Any IT decision has a domino effect across an organisation because contrary to the way business is internally organised, all companies represent a set of inter-twining, interdependent processes where failure in one part impacts someone, somewhere down or up the value chain.
- It follows that the impact on people is never simply direct but indirect. Therefore, we need to establish measures that seek to follow the domino effect to assess where value may be unearthed and where it may be hindered when considering investments. In other words, risk assessment is an integral part of discounting the return value of any investment.
- Such measures cannot be restricted to accounting measures but need to be located in the emerging measures being applied to human capital management. Here I would defer to some of the work being undertaken by Jim Holincheck because Jim has an excellent grasp of HCM and financial issues in the context of large scale implementations. Jim’s insights would help inform the general construction of ROI calculations for any organisation.
- IT decisions are no longer about efficiency or cost reduction but about effectiveness. In other words productivity. We therefore need to think in those terms as they apply to increasing stakeholder value.
- Using stock market valuations represents a start but it has to be done sensitively. It has to take into account industry business cycles as well as general economic trends and has to reflect the general characteristics of the industry as a whole. This allows for sensible, relevant measurement.
- Positioning ROI as a valuable starting point for a two way negotiation where the goal is to maximise value rather than purely as a way of justifying a business case .
Any takers?
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