Determining ROI

As per the Infrastructure Strategies survey, Network Magazine - IMRB Survey, 2004, Internal Rate of Return (IRR), Net Present Value (NPV), and Economic Value Added (EVA) are the most common methods used for determining the ROI. Of these, IRR is the most prevalent - nearly 26 percent CIOs apply this method.

Calculating the ROI for an ERP implementation may involve juggling with multiple variables: one has to consider the cost savings in terms of reduced inventory, faster production processes, or better inter-departmental communication. On the other hand, ROI on an enterprise-wide VOIP application would be as simple as calculating the cost savings by making voice calls over the existing data network instead of the telecom network.

32 percent of the CIOs do not employ any financial technique to determine the ROI. These CIOs rely entirely on the intangible benefits gained from an IT implementation instead of calculating it in pure financial terms. Of these, nearly 36 percent feel the right time frame for accessing the ROI is six months after implementation.

The right approach

The survey clearly points to the fact that most CIOs focus more on the intangibles than the money returns when it comes to measuring the success of a technology implementation. The question is: Is this the right approach?

Given that IT is firmly woven with various business processes, it's understandable that one needs to consider the issue of not being in business, or being unable to compete in the market if basic IT infrastructure/automation is not in place. But one needs to look at the financial part as well.

A certain level of financial discipline will help an organization manage its existing IT infrastructure better. ROI calculation will bring about this discipline. The right approach would be to give equal importance to both: ROI techniques as well as the intangible benefits when measuring the success of an IT investment.