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Five critical factors that define ROI of IT projects

While cost is certainly an important factor in defining IT projects' ROI, Rob Livingstone recommends that companies also evaluate risk and value.

Why is it so hard to define ROI (return on investment) for IT projects?

Getting the balance right between investing in IT to drive innovation and minimize IT cost, all the while keeping an eye on the identification and mitigation of risk requires constant vigilance.

Rob LivingstoneRob Livingstone

At the end of the day, it's how the R in ROI -- the return -- is defined and linked to the I -- the investment -- that is key. A clear understanding of value -- for both IT as a whole as well as specific IT projects -- is at the heart of this relationship.

Enterprise IT in most organizations sits somewhere on the three axes of cost, risk and value. The dimension of cost is the easiest to quantify, and often attracts the greatest focus.

But cost shouldn't be the only consideration in the effort to define ROI for IT projects. A discussion of the following five factors might help organizations obtain a better perspective and arrive at the optimal balance between cost, risk and value.

Factor 1: Define ROI value in terms that are relevant to your organization
There is no precise definition of "value." A prerequisite for defining the business case for individual IT projects (as well as for IT itself) is the definition of value in the context of your organization. Ultimately, value translates into financial information; however, ensure that the meaning of value is clearly defined across all other dimensions, including risk, opportunity cost, correct assumptions, innovation, agility and appropriate decision making.

Factor 2: Each enterprise IT project is unique
Even though the same IT system may have been implemented before in organizations similar to yours and in the same country and industry, these organizations might have taken vastly differing approaches and experienced variable outcomes. The assumption that "because it's worked well there, it'll be guaranteed to work here" should be tested rigorously for important IT projects.

Factor 3: Cutting costs is easy, but realizing value is hard
Expecting an underfunded, poorly structured IT team with the wrong mix of skills to be able to drive real value for your organization is an assumption that needs to be tested. Equip your IT team adequately or select IT vendors that can work as a true peer with the organization.

Factor 4: Recognize that it's not the responsibility of IT alone to define ROI for IT projects
IT may control the I in ROI, but the R is the joint responsibility of both IT and the organization at large. When it comes to implementing important, technology-dependent business initiatives, staff incentive schemes can be counterproductive if they're poorly designed. Incentive schemes for line-of-business managers should be adjusted to reflect their accountability in ensuring that important enterprise IT projects are implemented effectively.

Factor 5: Upgrade your IT vendor management strategies
The conventional approach to managing IT vendors might not be adequate in the delivery of new, emerging and/or disruptive business technologies. Revisit your IT vendor management strategies accordingly. However, avoid falling into the trap of thinking that because IT is too hard to manage or understand, outsourcing IT is the easier alternative. It could cost you dearly in the longer term.

Some organizations still adhere to the traditional managerial model that IT is a service function to the business, and therefore, subservient to its demands. These organizations potentially miss the golden opportunity of having IT precipitate, drive and support technology-based enterprise innovation and transformation initiatives. Shifting this attitude is critical if technology is to deliver the optimal ROI for your organization.

About the Author
Rob Livingstone is a former CIO with more than three decades of experience in the corporate world. In addition to running his IT advisory practice, he is an author and commentator, providing authoritative, independent insights on a range of IT topics including emerging technologies, governance and IT security. Rob is the author of the book Navigating through the Cloud and is also a fellow at the University of Technology Sydney, Australia, where he teaches leadership, strategy and innovation in the school’s flagship MBITM program. Visit Rob at www.rob-livingstone.com or email him at rob@rob-livingstone.com.

This was first published in May 2014

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