By virtue of its very name, return on investment implies a laser-like focus on the bottom line. That's been a problem for IT, which is a bit like the square that never quite fits into the round ROI peg.
Rather than the traditional ROI formula of dividing net profits by total assets, says PriceWaterhouseCoopers analyst Navjot Sidana in a Network Magazine India article, IT is better served by comparing the magnitude and timing of expected gains to investment costs. ROI analysis of IT also increasingly includes intangible as well as tangible benefits, he says.
Indeed, two other PriceWaterhouseCoopers analysts, in this CIO.com Asia article, contend that CIOs who zero in too closely on ROI as a measure of success may pass on projects that, while they offer no immediate bottom-line benefits, could improve their companies' competitive advantage.
Another issue with ROI analysis for IT initiatives is that it often does not take enough of a long-term view, nor does it take into account such factors as changes in project scope, insufficient historical data or management involvement, Fam Associates founder Freddy Fam told us in an IT Business Edge interview.
Yet despite these mitigating factors, smart CIOs will focus on technologies with a high potential for delivering shorter returns, Opinion Research Corp. EVP Jeffrey Resnick told us. This becomes especially important in light of Opinion Research Corp.'s findings that only one in four CEOs say that ROI for tech investments has fully met or exceeded expectations.
Some good tips, from Sidana: Calculate ROI twice, once for the expected ROI and again for a worst-case scenario. Focus on what the technology enables rather than the technology itself.