The case for IT investment
1 April 2005 | 0
It used to be so easy. When computers first started appearing in businesses, the return on investment could be calculated so easily. Just count how many people you could replace — and in those days a single computer could replace an awful lot of men with adding machines — count up the saving in salaries and divide it into the cost of purchasing the behemoth and voila, you had a timescale in months or years over which the new computer would pay for itself.
It’s not so easy now. Rare is the business that doesn’t have some form of computing infrastructure from a humble PC to a fully networked client/server system. Fortunately, during the boom times of the late 1990s when budgets were freer, such details didn’t matter. ‘During the late 1990s and up until early 2001 it was quite often the case that companies wanted their IT projects carried out quickly,’ says Michael Coleman, who leads Financial Management Solutions within IBM’s Business Consulting Services. ‘The return on investment case was written at a high level and it was more important to get the project completed than for it to make financial sense.’
Brendan O’Reilly, country manager of BMC Software agrees. ‘My general take on this would be that traditionally in the IT industry we were good at the project development end, applying science and methodologies to the building of systems. Then it goes live and we’re not very good at it anymore.’ O’Reilly compares the IT industry to shipbuilding where, he says, designers put a lot of thought into the running costs of a vessel at a very early stage. ‘We don’t do that and that’s wrong,’ he says. ‘You have a situation were the application development people work separately from the data centre people and the focus is all on how much the application costs to make, not on how we are going to run it.’
‘In other industries you would sit down and make a full blown investment case setting out start points, end points, an implementation plan, and short term and long term benefits,’ says Coleman. ‘In IT, some investments have been piecemeal and have crept through. But IT is no different to any other major expenditure and should therefore be subject to the same rigours as, say civil engineering, that’s the change that’s occurring.’
Spending sink or value added?
The key to a successful return on investment proposal is to move IT from the debit side of the ledger to the credit side. For many financial officers within a business, the IT department is seen as a spending sink and in rare cases it doesn’t generate revenue. But is it adding value? Value is added in two ways: through hard and soft benefits. Hard benefits are of the kind described in the opening paragraph where overheads are eliminated with a clear impact on operating expenses. Soft benefits are less easy to measure and are more intangible.
But how do you make a return on investment case if the benefits aren’t tangible? ‘One that a lot of people struggle with is e-mail,’ says Ian Taylor of Microsoft. ‘How do you put a value on e-mail? But if you ask many IT directors what is their most mission critical application, they will say e-mail. It brings huge benefits in terms of collaboration. It makes people more productive and information flows around the organisation much faster. It’s hard to put a figure on how much e-mail saves a business but ask the help desk when the phones ring most and they’ll tell you it’s when the e-mail system goes down.’
Judging the value of a product by the impact it would have if it were to be removed applies to more than networks. ‘It pains me the number of organisations that don’t look at the value of what they have,’ says Taylor. ‘How many organisations look at IT as a cost on the balance sheet? They don’t look at the value within an organisation of current investment. For instance, imagine I’m an IT manager and at the end of each quarter I have business analysts sitting there preparing results — and what are they using? They’re using Excel and Word and e-mail. Turn off those tools and give them pencil and paper and they will soon see IT as a benefit on the balance sheet.’
Other benefits categorised as soft would include improved business processes. ‘If you invest in an ERP system,’ he continues, ‘you get hard benefits such as reduction of your procurement base. Soft benefits would include the way the company works. Short-term stuff like cost cutting is always going on but true long-term competitiveness comes from changing the way the business works and IT has the ability to change the way the business works’.
Making the case for IT
With the growing importance of return on investment, many vendors are developing or using tools to help IT departments make their case to those who controls the purse strings. Microsoft, for instance uses something called Rapid Economic Justification (REJ) for large deployments.
‘This is a tool we use with customers who are looking at upgrading to the latest Microsoft product,’ explains Taylor. ‘For instance, they might want to upgrade to MS Server 2003 and then put Office 2003 on their machines when that package becomes available. We can run REJ for them for their business and show where they will derive savings from deploying new technology into their business.’
These exercises, he says, can last several months in order to understand the business although others can be shorter. ‘It’s all down to the complexity of the organisation and what that organisation is trying to do. If they are deploying a complete refresh of their servers and upgrading every desktop, that’s quite a big job, while a simple desktop refresh would be much simpler.’
Microsoft is also planning to release new tools in the very near future. ‘Around the Office 2003 timeframe you will see a lot of tools being made available to IT directors to help them answer such questions as: “what is it about the new release that makes you more productive?” So there will be a much greater push from Microsoft about looking at value.’
Microsoft is not alone in offering such tools. Storage specialist EMC has a number of products to manage the storage of data over a network. According to Tony Quinn, EMC sales manager: ‘the whole purpose is to address a lot of factors that cost money in running day to day technology structures. We provide software tools under the AutoIS banner that attempt to automate as much of the manual activity that normally goes into managing a complex enterprise storage environment. For instance, many tasks that were formerly done manually can now take place with a single mouse-click’.
Furthermore, says Quinn, people used to use what could be termed expensive storage subsystems to store all sorts of data. However, the industry is now embracing the concept of information life-cycle management. ‘While an application is being developed, a piece of information could be deemed mission critical. But as it ages it doesn’t change so it’s ridiculous to keep it on high value storage subnetworks. AutoIS can recognise when data is at the fixed content stage and it can be moved to less expensive storage such as the CX Clarion range of products or Centera which is our fixed content storage product.’
Quinn describes a typical return on investment scenario for EMC products. ‘We had a telecoms customer whose justification for replacing their existing storage was based on the number of billing runs. In same period of time it took them to run one billing cycle with the old storage they could run 12 cycles with EMC. The payback for that investment was reached within months. In this particular case there was a backlog of bills but we could run simultaneous billing to clear that backlog.’
Quinn quotes another example based around the fact that in the UK, a number of financial services companies are opening branches in shopping centres. ‘There is now technology in place that allows housekeeping functions to be taken off line,’ he explains. ‘This means the revenue generating systems can be left up and running much longer and that means they can keep branches open later in the evening. The return on investment case was based on the extra transactions they could do in extra time.’
Performix Technologies sells performance-management software into the financial services and telecommunications sectors. According to marketing vice president, Rosemary Turley: ‘to put it very simply, the old fashioned concept of performance management is to give people feedback and reward training. We took those concepts and married them with data and created a piece of software that provides everyone with daily feedback’.
According to Turley the key is for companies to ask why they are in business and what they are trying to achieve. Those goals can then be broken down into activities that people can focus on if the organisation is to be successful. ‘We provide people with daily feedback against those targets and objectives. The software drives training development plans and performance related pay. In any given organisation, if you look at the profit and loss balance sheet, the biggest item is the salary line. The theory is: if you can get a little bit more productivity from 90 per cent of your employees, you would make a significant impact on the bottom line.’
Turley cites a case study as the best way of demonstrating how the product can be used to measure return on investment. ‘A lot of organisations we have worked with have invested in CRM software to try and improve service to the customer. They’ve invested the money and put in the packages, but are the employees using it properly? Are they working through the flow, improving the service?’ If they are, then the investment in CRM can be justified, but if they aren’t the incorrect behaviour can be modified so that value from the investment can be obtained.
Another package for this type of assessment is Concord eHealth, distributed in this country by Data Edge. The company’s clients include Vodafone and VHI. ‘These are people with complex ICT infrastructure,’ says Paul Kelly a product manager with the company. ‘They may have bought point solutions in the past but the problem is that the different problems may not interact properly. Concord eHealth offers a huge amount of automation and integration and can give the head of an IT department a complete end-to-end overview of system performance.’
Kelly quotes as an example a recent installation at the VHI. ‘We did extensive pre- and post-installation return on investment calculations looking at three areas: applications, systems and networks. If we take networks, when we look at WANs for instance, companies are typically way over-provisioned because the people making the decisions have no insight into the requirements. To cover themselves they will go bigger than they need. With technology like frame relay, a lot of people will have over-provisioned the committed information rate (CIR). Thanks to us, VHI was able to reduce its CIR with confidence and saved over EUR50,000 in the first year by trimming WAN bandwidth to what they needed rather than what they thought they needed.’
He continues: ‘a Concord return on investment calculation is not just about the people you need to keep key applications running, but in the event of an outage, what impact does it have on people and at what cost. If you lose a key server and have 500 people doing nothing for two hours, how much is that costing you?’.