IT organizations are faced with issues of implementation and management of the complex, distributed and heterogeneous information systems and infrastructure. Those systems provide an efficient and competitive advantage to companies and condition their strategic decisions and business success.
To reduce the risk of such ventures and to demonstrate real value that information systems deliver, companies should perform a return on investment analysis before each major project.
What Is ROI?
Return on investment is one of the most popular business evaluation metrics used today. It is a powerful tool for evaluating projects and deciding on their profitability. Return on investment (ROI) analysis has the purpose to assess whether a project is cost-effective for the organization or not.
The goal is to achieve a return on investment, but the question is in what form and to what extent will it be achieved. The methods used in the analysis do not guarantee success, nor a way to measure the absolute values of all the potential parts of the system.
Basic questions that ROI analysis attempts to answer include: Does the system contribute to the overall goals of the organization, can the system be implemented using the chosen technology (taking into account its limitations), and can the system be integrated with other systems in the current environment.
Calculating the Feasibility of IT Projects
The feasibility of an IT project can be viewed from several aspects including the financial, operational, technical, time, organizational and social feasibility. Although it always comes down to financial feasibility, other factors also influence the project approval process.
While performing a return on investment analysis, both the measurable (tangible) and immeasurable (intangible) benefits should be taken into account. Measurable benefits are those that can easily be presented in the metric of money or time, while the immeasurable ones are difficult and complicated to define.
Measurable factors include costs of IT projects such as hardware, software, licensing, communications, networking, staff, web hosting, maintenance costs, data conversion, integration and finance.
Examples of immeasurable factors include productivity, quality, customer satisfaction and loyalty, improved timing of product or service in use, increased diversity of products and services, increased employee satisfaction, automation of manual activities, greater productivity and end-user resistance to change in the future.
What an Effective ROI Analysis Must Address
An effective ROI process has to be simple (without complex formulas), easily implemented, assumptions and techniques have to be creditable, and the analysis has to be theoretically sound and based on generally accepted practices.
First of all, the initial investment costs that include third-party software, hardware and internal (such as training) cost, should be evaluated. Secondly, recurring costs, such as software and hardware maintenance costs, staff, facility and travel expenses, should be evaluated. Finally, potential direct and indirect benefits gained from the project should be addressed.
The most basic formula to calculate the return on investments is:
This results in a percentage which indicates the feasibility of the project. Gain from investment is usually expressed in the financial gain from selling, however other factors should be taken into account as well.
Although the ROI analysis may seem like an easy mathematical calculation, experience has showed that this is not the case. Intangible benefits – factors that cannot be put into any mathematical formula, play a very important role in the project approval process.
Customer satisfaction and loyalty often overcome any financial metrics included in the ROI analysis. Therefore it is hard to develop any universal formula for measuring return on investment in IT. Wisdom, experience and intuition, as the most important characteristics of every good IT manager, play a crucial role in the assessment of project feasibility.