Going Beyond Traditional ROI BY JEFF THULL
$364 million impact. That is the true potential value of the
solution and the realistic target.
THE PURPOSE OF ANY BUSINESS INVESTMENT IS TO
deliver net economic value. Yet, research has shown that
in more than 60 percent of IT implementations, the value
expected or “promised” is not being received. So the critical
question is, “How can CIOs optimize the value achieved
through critical IT investments?”
The answer is to calculate value by going beyond tra-
ditional ROI measurements to achieve a more holistic
approach. That would include the following:
•;The;firs T and best-understood perspective of value is
the product viewpoint. This considers the physical attributes (processing speed, accuracy, durability, availability,
etc.) of the IT solution. The product level of value is
the easiest to determine but provides the least amount
of differentiation among suppliers. It is typically calculated by the vendor in its ROI model and is comparable
among vendors. It can be thought of as “generic value.”
• The second perspective is the process viewpoint.
When the solution is implemented, it has an impact
on the way a process is performed, and thus the inputs,
costs and outcomes of that process come into play. Many
vendors consider and calculate the impact only on the
processes directly, but they do not consider the related
impact on processes upstream and downstream.
•;The;Third perspective considers the strategic impact—
an impact on multiple processes, affecting their ability
to carry out key strategies. An example would be a document management and collaboration system. When
evaluated in a vertical such as pharmaceutical manufacturing, a key process that’s affected is the organization’s
response to Food and Drug Administration queries
during the drug-approval process. This process requires
a cross-functional review and response, thereby having a
considerable impact on labor and time savings. The net
result of this system is the ability to route a new drug
through the FDA approval process faster and bring the
drug to market sooner.
Few, if any, vendors will provide helpful insights into
strategic value perspective, so customers will have to interpret strategic value on their own. However, a progressive
solution provider will provide valuable insights and support
at the strategic level.
The scale of the economic value across these three perspectives is dramatic. In the above example, at the product
level, a $3.5 million solution investment provided $3 million
in savings in areas such as storage costs, access time and
hardware maintenance. This is an attractive 86 percent ROI.
The process level impact was calculated to be $12 million, but bringing a new drug to market sooner created a
Know the Net Economic Impact
Vendors must be prepared to calculate the net profit that
could potentially be available to their customers from
using their solutions. It’s the only effective way of communicating the usefulness and true potential value of their
proposed solutions.
CIOs need to start in a different place. Calculating the
potential value of an IT solution raises an important question: “How do you know what you need in the first place?
Are you pursuing solutions, or are solutions pursuing you?”
CIOs should always consider four critical components
of net economic impact:
1. Baseline performance: How much net profit is the
IT function currently delivering?
2. Requirements: How much additional net profit
could be created through the effective use of IT in
the business?
3.;capabilities: To what degree is the potential solu-
tion capable of delivering the additional net profit?
4.;constraints:;What elements in the organization will
prevent or dilute its ability to achieve the required value?
Knowing the answer to the first question is essential
to understanding whether the IT ROI is running at an
acceptable level and how credible the IT function of the
solution is. The second question highlights and quanti-fies performance gaps across the enterprise. Even more
important, it creates an “inside out” approach to developing solutions and achieving value by defining the substantial process and performance requirements—rather
than solution capabilities—that are required to close
the gap.
Answering the third question allows CIOs to accurately
determine the chances of solution success. Finally, the last
question helps CIOs ensure that all potential constraints
to success will be addressed, leading to optimal value for
the organization.
By considering the product, process and performance
perspectives of value, CIOs can determine the true economic value required by their organization. They can
then evaluate the capabilities of various vendor solutions,
along with the capabilities of the affected functions in
their organization, to optimize the value impact of a given
implementation. 3
Jeff Thull is president and CEO of Prime Resource Group and
the author of Mastering the Complex Sale, Second Edition.
