Business Benefits of Utilizing ROI Analysis
For IT decision-makers, Return on Investment (ROI) analysis is rapidly becoming a requirement prior to new Information Technology (IT) investments. In fact, according to a recent InformationWeek study, more than 82% of IT decisions now require an ROI analysis.
Is ROI the silver bullet to analyze all IT decisions? Certainly not. Are all IT benefits quantifiable? No. Then what's the big deal about ROI?
Quantitatively defined, ROI is simply the benefits of an investment divided by the costs, expressed in percentage terms, normally over three years. However, when an ROI analysis is completed solely to get an end result number, many of the major benefits of an ROI analysis are not realized. The inherent benefits of an ROI analysis go well beyond the numerical result, and include:
- Shortening the Purchase Process
- Building Consensus within Your Company
- Establishing a Rational Vendor Selection Process
- Standardizing the Purchase Process
- Focusing on the Business Issues
- Gaining Senior Management Support
- Establishing an Historical Record
- Sleeping at Night
Shortening the Purchase Process
An ROI analysis can dramatically reduce the time and effort associated with the purchase process. By showcasing the business impact of the technology, it becomes easier for senior management to understand the business implications of your decision. International Data Corporation (IDC) found that the average sales cycle for a million dollar Lotus Notes deal is 18 months. For those companies completing an ROI analysis, 65% reported their purchase process to be 6 months or less.
Building Consensus within Your Company
New IT purchase decisions can be made without a full consensus. However, the success of a new IT initiative often is based on consensus within the organization that it is a good idea. Quantifying the benefits of a new project can make it easier for managers to justify change and for employees to endure possibly, some short-term pain. As a result, an ROI analysis is a very important tool to get everyone in the organization moving in the same direction.
Establishing a Rational Vendor Selection Process
It is all but impossible not to have a leaning towards one vendor's product over another. An ROI analysis helps to eliminate vendor bias. In particular, it heavily penalizes products that require greater than averages time and/or resources to initially deploy. It rewards products, which have good user acceptance, and ones that can automate a broad range of functions. It rewards products that are enterprise in nature and penalizes products that have poor development environments. All in all, an ROI analysis is a rational foundation for comparative decision-making.
Standardizing the Purchase Process
As consultants, one of the biggest complaints we heard from senior management was the lack of consistency in the business plans for potential IT projects. It seemed that every time a group approached them with a new idea, there seemed to be a different set of financial assumptions and included categories, e.g., training. Companies need a way to standardize on a set of financial assumptions. ROInow! provides an easy way to accomplish this standardization, and is a foundation for "apples to apples" internal IT project comparisons.
Focusing on the Business Issues
Discussions with vendor sales people tend towards feature/function competitive discussions. Completing an ROI analysis ensures that both you and your potential vendor focus on your organization's business problem and guarantees that your vendor gets a holistic view of your organization's needs and motivations. An ROI analysis can be the cornerstone of a better understanding between you and your IT vendor.
Gaining Senior Management Support
ROI analysis is a discipline that forces you to look at the costs and benefits of a project. "Costs," "benefits," and "returns" are concepts that senior management is comfortable making decisions by, rather than bits and bytes. By speaking their language, technology purchases are related to business goals, improving chances that the project gets funding. The days of technology for technology's sake are behind us.
Establishing an Historical Record
As more companies merge and senior management turnover increases, it becomes increasingly difficult for companies to remember what projects were implemented, why, and when. ROI is an excellent method to remind people at a later date what was done, why it was done, and what the contribution was to the company's bottom line. ROI analysis is becoming an employment stability factor.
Sleeping at Night
Few IT managers have not lost sleep wondering what may happen if project costs run over by 30%? Or if user acceptance is slower than anticipated . . .or if employees need more training than planned? Using ROInow! for your ROI analysis allows you to complete all kinds of "what if" scenarios. Furthermore, ROInow! allows your financial people to change any financial assumptions, such as cost of capital, tax rates etc. To the finance group, this ability to quickly change and customize your ROI analysis gives your project credibility that a simple spreadsheet could not. There is no reason to lose sleep over the imponderables.
Your Business Benefits
Is ROI that white knight that will ensure all IT purchases will be beneficial to the company? Not exactly. But an ROI analysis is something senior management understands, and it instills rationality and standardization in the IT decision-making process. CIOview's ROInow is a fast, easy-to-use product, with a built-in knowledge base, that puts you at the head of the line in ROI analysis for your IT expenditures.
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