How To Build The ROI Case For IT Projects

In the ongoing IT investment drought, technology managers are finding that a return on investment (ROI) analysis is no longer just a helpful tool to assess the viability of a technology investment, but a prerequisite for funding. If you want to win the competition for capital playing out in every company, it's a necessity that you build your ROI model right.

ROI has always been a kind of gatekeeper to determine where a company's capital is invested: do we invest in this new plant, new infrastructure equipment or new training facility? Various ROI techniques, including Internal Rate of Return, Discounted Cash Flow and Payback assist executive decision makers in determining which investment will deliver the highest financial payback when many projects compete for the same investment dollars.

While IT is fairly new to the demands and disciplines of this financial logic, it is clear that past, massive cost overruns and project failures have caused technology investment analysis to move very quickly out of the exclusive domain of the IT organization and onto the CFO's desktop.

Given this reality, IT shops must follow a checklist of principles in constructing a financial analysis of technology projects to ensure their funding:

• Understand what aspects of ROI analysis are best featured for a given project. The value of infrastructure projects -- such as updating Web infrastructure -- are best justified through a Payback measurement, while supply chain and CRM projects offer potential new revenue, whose impact is best expressed in a Discounted Cash Flow analysis.

• Learn from other successful initiatives: If ROI analysis is new to the IT organization but not the rest of the enterprise, examine how financial analysis was constructed for these non-IT projects. Technology is manifestly different in an analysis approach than plant and equipment, yet such a comparison will give a flavor for the amount of rigor and detail to include in the analysis. You might see a pattern emerge: the higher the dollar value of the prospective investment, the more detail and rigor in the business case analysis, a hint of the job before you.

• Leverage your IT vendors: Ask your vendors to help you identify and quantify the tangible benefits you can include in your analysis, in part through the experience of other customers. For example, SANavigator (www.sanavigator.com), a vendor of storage network management software, helps IT professionals frame the benefits associated with their software, such as reduced operational costs. However, unlike other technology vendors, SANavigator takes the additional step to help the IT professional drill down into discrete tangible, quantifiable benefits such as: reduced training costs and reduced salary costs. (Full disclosure: SANavigator is a consulting client of FutureSight Consulting).

• Validate vendor claims: Challenge vendors and the numbers they throw at you before you pitch new systems based on their products to senior management. The technology manager accountable for the soundness of the ROI analysis must vet the cost and benefit measurement results the vendors are tossing around and decide if they should even appear in a presentation to the CFO. The fastest and surest way to shoot down your technology project is by losing the respect and credibility of senior management when you build your analysis on the bogus claims of vendors.

• Gather Real-World Proof: Avoid the heartbreak of having a project turned down even if the ROI analysis and business case are great. Since business cases are estimates and not gospel truth, even the best projections will be met with a jaundiced eye during financially lean periods. However, one way around this is if you can obtain real-world, post-investment performance metric results from other vendor customers who are tracking the results of your investment. Many companies are new to this practice (only a handful of vendors are assisting customers with post-investment tracking). Yet nothing beats real-world success for executives to sit up and take notice.