The Yellow Brick Road (cont'd)

Pragmatic ROI

This month, we'll turn our attention to setting the foundation for a winning project: understanding its value to the corporation. Projects can't get funded without a good understanding of the business benefits that will be delivered, and how that achievement will be measured. This means sitting down and working out the Return on Investment.

Mention ROI and people react with drooping eyelids, or with gnashing of teeth, or by changing the subject. And, it is understandable given that… developing an accurate ROI calculation is always hard work, and sometimes nears impossibility.The complexity in defining ROI is trying to compare a hypothetical future state against an unquantifiable current state.

Hypothetical future state
Changing market conditions and changing business priorities can be modeled with a fair degree of accuracy, or at least consistency. The really challenging part of the forecast is to decide how close a project will come to achieving the capabilities and benefits extolled by the OSS vendor or the Systems Integrator. Will all promised functionality be delivered? Will it work as promised? Will other changes to the OSS environment underway in other areas significantly affect what can be achieved? Has anyone ever achieved anything like the promised returns? Probably not because basing an ROI on uncritical acceptance of promised benefits is folly. An ROI also needs to contain estimates of projected costs… How much should we allow for extras and contingencies? Double-digit safety margins are no longer safe… think 100% and upwards. Are maintenance, support and upgrade costs guaranteed? The list is long, but we'll provide some suggestions about what to consider when it comes to issues like Risk Management and Total Cost of Ownership.

Unquantifiable current state
Even companies with extensive data warehousing capabilities are unlikely to have the ability to cost-effectively identify, quantify and apportion all of the factors associated with the specific functions that will be affected by a specific project. Even if the data is absolutely accurate, gathering details about staff involvement, information flow, task volume, exception handling, allocation of IT resources, by service, by territory, by customer segment, quickly becomes an exercise that costs more than it is worth. Sometimes it all seems like too much hard work. As a result, companies may make one of two big mistakes.

Common Mistakes

At one extreme, a company will go into decision limbo for weeks or months as operational and IT people struggle to put together an ROI model that will satisfy the accountants and company executives. They're never satisfied, because the future state is impossible to guarantee and the present state is too complicated to measure accurately. No decisions and thus no progress are made. At the other extreme, we have seen complex multi-million dollar systems being bought on the basis of no more than a gut feeling, or a buddy's recommendation, or the comfortable feeling created by a decent dinner in a fine restaurant, courtesy of a vendor. Either extreme can be bad news for a company.

It is generally agreed that the case for spending millions of dollars should always be made with a clear understanding of prospective benefits, costs and impacts. It is entirely reasonable to want to make fact-based decisions, and to want to be able to measure the effectiveness of any investment. So what can be done to make the ROI exercise more efficient, less painful and more useful?

The Pragmatic ROI is a model that can be used throughout the lifecycle of a project, from Concept, through Feasibility, Define and Design, into Implementation, and of course Post Implementation. It is driven by a combination of business facts and anecdotal data, seasoned with a large measure of caution and a sprinkle of skepticism. It can be initiated quickly and applied consistently.

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