The death of ROI: re-thinking IT value measurement

Thornton A. May Vice President of Research and Education, Cambridge Technology Partners, Cambridge, Massachusetts, USA
Presents the case that traditional return on investment (ROI) as an approach for justifying and measuring the value of IT investments is no longer appropriate. Argues that measures of nancial return need to be supplemented or replaced by disciplined spending behaviours that are sensitized to calendar, infrastructural, temporal, security, knowledge, accountability and connectivity issues. Concludes that organizations that fail to redene their value targeting and resource allocation processes will end up engaging in dysfunctional management practices.
In todays dont-blame-me, blame-my-metrics world of non-accountability, one receives little argument when lamenting that Generally accepted accounting principles (GAAP) measure the wrong stuff . People from all parts of the organizational village agree that GAAP doesnt appropriately measure or value speed or velocity (e.g. time-to-market, time-to-full-value usage, customer responsiveness), it doesnt measure smart (e.g. what you know or who you know or how fast you learn), it doesnt measure happy (e.g. employee morale or customer satisfaction). In the world of electronic commerce, underserviced customers quietly click away, never to return. Additionally, GAAP doesnt measure the critical dimension of connectedness (e.g. how easy is it to do business with you or how appropriate and well-executed your channel strategy is or the quality of your relationships). The bottom line of all this unmeasuredness is that return on investment (ROI) is dead. Any company relying on traditional accounting to pass judgement over information technology investments will overspend, misspend and under-deliver, while less methodologically hampered investors will be eating your lunch. Going digital does not have to be synonymous with being stupid. The commercial world has split itself in three: 1 organizations that view underperforming IT investments as a problem that can and must be solved; 2 organizations that view underperforming IT investments as a dening condition of the complex world we live in (something which isnt fun but that cant really be changed) and; 3 organizations that are in denial that IT moneys are not being spent wisely . Research collected at 24 problem-solving Lycea[1] (high intensity CIO-only information exchanges) indicate that corporate patience with poorly-operating value targeting and resource allocating processes has just about run out. Of the IT executives polled in these sessions, Sixty six per cent said the current process involved the wrong set of people; Seventy ve per cent said the current process targets the wrong class of opportunities; Eight one per cent said the process takes too long; Ninety ve per cent said they were dissatised with the status quo. The big question, then, is what kind of IT investment process and methodology will replace, can replace and should replace the no-longer-relevant ROI model? While a consensus answer has not emerged, the process elves, beavering away at the investment workbenches of high performance organizations around the world, have focused their reinvention efforts on seven major areas.

You arent a druid, why invest like one?

IT has become a prisoner of history We have . to evolve out of the calendar-based budgetingrhythms established by our ancient agrarian ancestors. Every year in the early autumn (because of the linearity of spread sheets, the lack of imagination on the part of senior management, and a thousand years of past behavior) we anchor what we will spend in the future on what we have spent in the past. Late fall discussions in CIO-bars are lled with My budget (as compared with last year) went up 30 per cent, went down 20 per cent type of reporting. What a huge and massive yawn. Every year is not like every other. Some years are enormously opportunity-rich. Some years are not. What you spend should be a function of what you can deliver. My biggest objection to the budgeting ballet is the unbelievably naive assumption that we can foresee what will happen in the future. The hubris of the leaders of a command-andcontrol hierarchy sitting on top of the calendar hill calling spending shots all at one time for the next 12 months amazes me. Most CIOs admit that if they are lucky they keep 20 per cent of their budget in reserve for contingencies. In todays world, everything is a contingency IT spending should be .
Thornton A. May

Information Management & Computer Security 5/3 [1997] 9092 MCB University Press [ISSN 0968-5227]

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Thornton A. May The death of ROI: re-thinking IT value measurement Information Management & Computer Security 5/3 [1997] 9092

recalibrated every day The process is really . quite simple. The line of business articulates what they want, how much they want to spend and when they want it delivered. Given these parameters, IT miracle workers can work their magic.

Big dogs fund infrastructure

Increasingly, infrastructure is what separates the high performers from the also-rans. Any dolt can fund a high payback application. True genius and courage characterize the infrastructure pioneers who are forcing their management teams to understand that you cannot run an information age organization without information age plumbing. Jim Best, former VP of information systems at Allied Signal, has written a wonderful book (The Digital Organization) which lays out a six-step strategy to upgrade infrastructure. Jim denes infrastructure as anything left out of the project business plan. New-think management groups no longer fund projects which low-ball infrastructure costs. Empirical data indicates that sophisticated global organizations need to spend $18 per desktop per month just to keep their bridges, routers and hubs current.

line-of-business executives do not understand this security stuff and feel blindsided and semi-betrayed. Ignorance in this area has an enormous cost multiplier it will slow you down, it will hamper your ability to connect, collaborate and exchange information with valuecreating entities both internal and external to the organization. You have to exorcise this demon get it out in the open, understand it, spend money to make it go away . Corporations worldwide spent $6.4 billion on computer security last year. Security wizards contend that most of that money was not spent wisely Rather than being deterred by . rewalls, uninvited consumer enthusiasts (aka hackers) view rewall-like point solutions as the crunchy outside to a tasty cybersnack. Corporations around the world need to get out of denial stage and come to grips with the new world of security-challenged systems. Jeff Moss, president of Def Con has created a forum (The black hat briengs) where corporate security officers and the hacker community can get together, constructively explore the weaknesses in existing congurations, and discuss where budget moneys should be spent.

Knowledge-starved Time blind

I have frequently used this column as a bully pulpit from which to evangelize on the importance of managing time. It is the most perishable of resources. It is also one of the most poorly managed things on this planet. No funding programme should be approved that does not explicitly state how long it will take (elapsed time); whose time it will consume; and from which activities that time will be pirated. Projects fail not because of technology glitches, but because key people did not have time to devote to them. Instead of processes designed to be decimal point precise, associated with returns on nancial capital, I think organizations would be well advised to create a metric associated with returns on temporal capital. What kind of return are you getting on your time investments? Instead of budgeting money, we should be budgeting time. The old world was obsessed with counting stuff nuclear warheads, battleships, armoured divisions, military personnel, durable goods purchases and machine tool orders. The networked economy is driven not by what you can count, but by what you know. The traditional reliance on hard assets has been replaced with a new premium on soft ones. The skills of people, the management of R&D enterprises and information, and the vitality of intellectual property will drive economic performance. What is your investment in getting smart? What is your return on that investment? Organizations who underinvest here are brutalized by key staff turnover and the necessity to pay spot-rates (i.e. consulting fees) for skills which do not exist internally .

Connectivity
TCP/IP is to the information age what re was to our prelapsarian forefathers. This protocol makes it possible to communicate using different kinds of computers attached to different kinds of networks communicating over different media. Connectivity and innovations around that theme have become primary business

Security pays
The perception of security problems is the Achilles heel of information technology and information technologists. Modern day Luddites are holding court and being heard crying that the cyber-sky is falling. Most

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drivers. High performance organizations do not necessarily build better mouse traps (which traditional wisdom argues will induce the world to beat a path to their doorstep), they do build better paths. How connected are you?

Summary
The broken ROI processes in place at many organizations need to be replaced by disciplined spending behaviours which are sensitized to the calendar, infrastructural, temporal, security, knowledge, accountability and connectivity issues raised above. Organizations that fail to re-architect their value targeting and resource allocation processes will devolve to a Hobbesian state of distrust, a war of all against all, where organizational life is nasty, brutish and short. The CIO is uniquely positioned to emerge as the right hero in the right place engaged in creating the shared spaces and common nomenclature wherein investments might be rationally considered and quickly executed. This new world of IT-enabled value creation contains none of the cold sterility of scientically precise, formula-driven absolutes. Our central certainty of value has given way to a series of negotiated, mutually-agreed-on business objectives.

Accountability-challenged
Someone in your organization has to accept accountability for IT-enabled value creation. In your organization, who might that be? I am struck by the global phenomenon that many organizations have trouble assigning responsibility . At the Controllers Institute (an intimate executive education session for the chief nancial officers at multinational organizations) held each summer in Maastricht, I teach a one-day session focused on the CFO role in managing IT. In the European environment the CIO typically reports up through nance. I asked, How many of you feel that you are in total control of your IT investment? Not one of them raised a hand. Basically, 100 per cent say they are not in control. The next week I asked the same question to managing directors of large Swedish organizations. Do you feel you are in control of IT? They said, No. Whos driving the IT value accountability bus?

Note
1 Source: Cambridge Technology Partners Management Lab: US and European CIO Lycea; Amsterdam, Boston, Chicago, London, Los Angeles, 1995-97.

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