What if... you needed an ROI case for everything?

Of course you have to justify spending but hasn't the ROI craze gone too far? Dale Vile goes even further...

People in IT have become obsessed with return on investment - ROI. Is decision-making solely in the hands of the bean counters these days? There is a belief that businesses can no longer buy anything unless an Excel spreadsheet has been produced outlining the detail of precise payback times and monetary returns.

This all means no self respecting corporate sales person turns up to a sales call without their ROI or total cost of ownership (TCO - that other addictive TLA) template in their kit bag.

But what would happen if the world really did start demanding ROI cases for every decision?

For one thing, many of our personal arrangements would have to change. Take the way we get around, for example. Even the most rudimentary financial analysis would blast the business case for driving a car completely out of the water, especially around London and other big cities.

Try annualising the cost of capital - for example interest on a car loan - depreciation, servicing costs, insurance, fuel and parking and work out how many bus, train and cab rides you could get for the same money. Strict ROI logic would dictate that most of us should ditch our cars and use public transport exclusively.

"But our cars give us freedom and flexibility," shout the drivers.

"Ah," say the bean counters, "but can you tell me what that freedom and flexibility represents in monetary terms? If you can't put a number on it, then it can't be a very tangible benefit. Stop coming to us with woolly business cases and get back on the bus!"

The problem is that it is quite difficult to translate many benefits into hard cash equivalents. This applies equally to IT investment in a business context. Does anyone really know the return on investment they get from their email infrastructure?

When the sales director complains - "Email is running like a dog again and my guys are telling me that they can't be sure of messages getting delivered reliably" - asking him to go away and work out exactly how much additional business he could generate if you bought a new server to fix the problem is likely to elicit a very impolite response.

Too often, we see IT personnel and project teams jumping through financial hoops trying to cost justify essential investments that are no-brainers. Being asked to make a detailed business case for implementing comprehensive virus protection is a bit like making a case to get dodgy brakes fixed on your car. You really have no choice - it just needs doing.

Blind application of ROI policy in areas such as these is at best a waste of everyone's time. At worst, it can stand in the way of getting budgets approved for essential investment in infrastructure, which is just asking for trouble down the line.

It is therefore particularly worrying when we hear people justifying their new ROI religion on the basis that they spent lots of money on things like Y2K and enterprise resource planning (ERP) and have yet to see a clear financial return.

In the case of Y2K, that's like saying it was a waste of money getting the brakes fixed on the car because you have never since had an accident.

And let's remember that many organisations embarked on ERP projects - handling payroll, HR and other key corporate functions - because their existing systems were old, fragmented, unreliable and about to fall to pieces under the strain of growth, change, mergers and acquisitions. Put simply, many companies needed to get their systems sorted out before they imploded and ERP was a way of doing this. The fundamental justification for Y2K and ERP is therefore the fact that you were able to continue trading as a business.

At the other end of the spectrum, a strict financial ROI approach can easily stifle opportunities to create competitive advantage or protect against competitive threat. Take the deployment of mobile technology to a professional sales force. This is an interesting example because, intuitively, few would dispute that providing sales people with the ability to access corporate information and perform transactions in the field makes them more effective. The trouble is that it is hard to put numbers around this but clearly not investing can often have a cost too.

Perhaps the main objection to the blind application of a bean counting approach, however, is simply that most organisations do not understand their existing cost and contribution structures well enough to feed sensible data into their ROI and TCO models. If you don't know how much the existing system is costing you or is contributing to the top line, how can you possibly assess the incremental cost/benefit of the new system with any degree of confidence?

Financial ROI models therefore become a political tool to help get decisions made on a pseudo-scientific basis, their authors knowing full well that the chances of anyone coming back and checking after the project are pretty slim.

So let's be careful not to kid ourselves that creating an Excel spreadsheet to back up every decision in itself makes those decisions more sound and secure. ROI and TCO certainly have their place and their application in context is extremely valuable. When it comes to decision making policy, however, they should be regarded as necessary but not sufficient. In particular, they are no substitute for common sense and good judgement.

What are your thoughts? Post a Reader Comment below or email editorial@silicon.com to let us know - or say what you'd like Dale to cover in future 'What if...' columns.

**Dale Vile is service director at analyst house Quocirca. His C.V. boasts years at Nortel Networks, Bloor Research, SAP and Sybase and his job now involves working with vendors and users wanting to tap the business benefits of technology. For more information see: http://www.quocirca.com

Past columns:
What if... everyone always knew where you are?
http://www.silicon.com/a52368
What if... the sales and marketing director was put in charge of IT?
http://www.silicon.com/a51814
What if... 3G was available right now?
http://www.silicon.com/a51156
What if... teachers were replaced by computers?
http://www.silicon.com/a50842