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Market Analysis: Motivations for Utilizing ROI Analysis in IT Purchasing

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Market Analysis: Motivations for Utilizing ROI Analysis in IT Purchasing

One Trillion Dollars Spent
US companies in the past ten years have spent one trillion dollars on information technology (IT). Yet there has been only marginal improvement in the productivity of more than 60 million American white-collar workers. IT expenditures now exceed 2% of the Gross Domestic Product in the US, but the net economic contribution of IT has yet to be realized. This is not a phenomenon limited to the US. Sweden invests between 10 and 15 billion dollars per year in IT. Recently, the Swedish government determined that 70 to 80 percent of these investments failed to generate projected benefits. As a result, more and more companies are beginning to question if yesterday's technology investments paid off. If they did not, what's to say future technology purchases will perform any better? This means that the selling scenario that once focused on "speeds and feeds" and "bigger is better" is over. Customers are looking for IT solutions that provide a competitive advantage. The only way to measure effectively the impact of these solution-driven sales is through some sort of quantitative analysis.

How Do You Measure Return?
Return On Investment (ROI) is the most common method to quantify the costs and benefits of new IT initiatives. A study published by InformationWeek found that 82% of organizations now require some form of Return on Investment (ROI) analysis prior to approving any significant new IT purchase. Unfortunately, 68% of those companies surveyed do not have any formal ROI measurement policy or procedure in place. They understand the value of ROI, but they simply have no means to effectively measure it. The InformationWeek study also reported that, for those companies that do not have formal ROI measures in place today, 23.2% expect to have them present within 12 months. Additionally, almost 80% of respondents believe measuring the ROI of IT projects is useful.

Effective ROI Measurement
Why has effective ROI measurement for IT been so difficult to establish? Largely, because ROI has been confined to financial planning and accounting professionals. It is not particularly hard to use, or understand, but if not practiced frequently it becomes a difficult, if not foreign, concept altogether. What are the challenges for companies trying to measure the ROI of IT projects? Respondents to the Information Week study suggested the following:

  • 77.9% said it is simply too difficult to measure the benefits of IT
  • 53.8% have no comprehensive or reliable metrics available
  • 35.6% can't provide a complete accounting of IT investments

Clearly, the importance of planning and measuring investments of any type is not in dispute. The vast majority of companies see the benefit of making their IT investments based on some form of rational financial analysis. Unfortunately, most companies are not equipped with the tools to measure ROI.

The Solution = CIOview's ROInow!
The solution is to come up with a way for non-financial business people to determine quickly and accurately the financial costs and benefits of various IT implementations. CIOview Corporation has developed ROInow! with the average IT decision-maker in mind, by providing:
    PreView
    A 5-minute ROI estimator, which uses industry benchmark data so you quickly can sift through a number of IT initiatives and rapidly select the most promising application.
    FullView
    An easy-to-use framework for building a robust business case, based on the unique cost structure and benefits of your company.
    Report
    Automatically generates a 25+ page report, including full-color graphics, which is customized to your specific company and plan.

In addition, a simple yet powerful "what-if" analysis capability allows you to change any of the baseline financial assumptions and immediately see the impact on your investment results. For example, you can change your tax rate, the cost of capital, even the depreciation method, and immediately see what will happen to all your respective financial data. Do want to see how sensitive your results are to a 20% cost overrun? All of these functions are accessible from a single screen. Once you are satisfied with the results, a comprehensive report can be generated in Microsoft Word, Microsoft HTML or Netscape HTML.

All in All The trend towards purchasing IT using ROI will benefit customers and vendors alike. From our experience, the faster an organization sees the business impact of IT the sooner they will implement new initiatives. The quicker customers can determine which technologies do not pay, the faster vendors will focus their research and development on products that do. ROI is here to stay -- whether you accomplish it with a stubby pencil or CIOview's ROInow!


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