Measuring ROI
commentary How are organisations looking at increasing IT spending?
What drives you to upgrade your IT infrastructure or spend money on implementing the latest technology?
How do you make (non-recurring) budget allocation decisions: based on a rigorous return on investment (ROI) analysis, comparing different approaches, as well as "do nothing"? Or founded on a desire to improve service levels and increase the value of IT's contribution to business growth? Or do you use a "containment" strategy, with every discretionary dollar directed to the neediest and most outdated element of the network?
The latter strategy is often the case in smaller companies, or industries where IT is seen more as a necessity than a source of competitive differentiation. Not all investment is reactive, but the majority of funds are allocated with a view to maximising the existing infrastructure and upgrading what is already in place, rather then purchasing new infrastructure. This accounts for the high level of services as a percentage of the total Australian IT spend (and the pain of many IT vendors who have seen flat to negative growth in core networking markets). An IDC survey last year showed that 28 percent of companies planned to do more with their existing systems infrastructure, with IP telephony/convergence the main bright spot in terms of major network investment. Our own observations support this research data, with many companies interested in outsourcing the management and support of their infrastructure, or using companies such as ours for additional networking expertise, as they seek to extend the working life of their infrastructure for another year.
Another focus on companies looking at getting more from their IT dollar is improving -- and measuring -- internal service levels. This reflects the trend towards appointing more senior CIO roles reporting to the CEO, the CFO taking a greater interest in the role of IT, and a greater scepticism from senior management about the value contributed by IT. Companies in this category are often also looking at reducing their total IT spend, but in a planned fashion that focuses on the interaction of IT with the rest of the business.
The MIS organisation is acutely aware of how the performance of the IT infrastructure is perceived by the business, and IT investments are made to improve performance or invest in areas that drive competitive advantage. This is the driver for investments in new technologies such as IP telephony that both reduce costs and enable more efficient communications. It's also reflected, again in our experience providing IT services and management, by companies interested not just in managing their LAN/WAN but measuring and reporting back to the business application performance, by location or business unit.
Overlapping a little with the focus on service level improvements is the more disciplined approach to assessing return on investment taken by many companies. Loren Hitt from the Wharton Business School established in 1996 the three principal ways in which ROI should be measured: productivity, profitability, and customer value. Clearly in the past few years there has been a shift in emphasis to projects that address at least one of these areas in a quantifiable fashion. A recent Gartner report states: "Although technology investment has not stopped, projects are smaller and more focused with an emphasis on rapid ROI." Companies are asking vendors and suppliers for a sales approach that is business rather than technology focussed, as well as taking their own assessment of cost versus business return.
We have customers that fit in all of these categories. As the "whole of business" approach gained popularity for its promise of reducing cost and improving service levels, to be rapidly overtaken by selective sourcing that we espouse, one or more of the same drivers apply. Maintain and prolong the existing infrastructure. Improve internal service levels ("align business and IT"). Or invest in the areas with the greatest return.
Oliver Descoeudres is marketing manager at network IP/Internet network infrastructure builder and solutions provider NetStar Australia.
This article was first published in Technology & Business magazine.
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