ROI Is King

Executives in charge of Internet initiatives are increasingly being asked to justify their technology spending, and the item at the top of the checklist is typically return on investment.

The new realism has set in, Internet technology isn't worth buying for its own sake — it has to produce results.

As the economic downturn persists, executives in charge of Internet initiatives increasingly are being asked to justify their technology spending, and the item at the top of the checklist is typically return on investment.

"Everyone's very jaded," says Bill Brandel, an analyst at Aberdeen Group. "They're essentially demanding return on investment up-front."

Return on investment (ROI) sounds like a simple proposition to evaluate, but it's not. Companies are finding it difficult to match vendor pitches to their own needs, and sometimes the returns don't come without adding and integrating several applications all at once. ROI is defined formally as the compound percent of return on the amount of capital placed in a given asset. However, the way the idea plays out in practice is broader than that strict financial interpretation. "It's not just savings, but also what makes an organization competitive," says Jon Ekoniak, an analyst at U.S. Bancorp Piper Jaffray.

Vendors have taken notice of this trend, and ROI claims now play a leading role in their standard sales pitches.

Eprise, a content management software vendor, says the "new Internet paradigm" isn't motivating customers anymore. The refrain Eprise often hears from customers is, "Tell me what I get out of this," says Hank Barnes, vice president of strategy. So Eprise talks more about solutions than features. Its "quick forms" was a nice feature before. Now it's a way to post fast updates for a company's sales force, he says.

Still, many end users feel that vendors aren't talking about what they need. "More and more I'm seeing the encouragement for ROI analysis coming from software companies themselves. Perhaps they're reviewing ROI from their own set of values rather than from ours," says Mike Webb, senior vice president of information technology at Flextronics.

Bernie Uhlich, director of global supply chain management e-business at Celestica, agrees."They talk about ROI in terms of what would be favorable to them, more so than my pain points and what I need," he says.

Much of the problem may be in how to define ROI. Buyers acknowledge that financial concerns play a role, but that's not the heart of the issue for them.

Sharp Microelectronics needed better content management to power its catalog, which led it to buy content management software by Eprise. For Redback Networks, the issue was replacing a Baan enterprise computing system that had grown clunky, which led it to install Oracle. Financial considerations were secondary to strategic priorities, the companies say.

"I think we looked at [the Enterprise Resource Planning decision] as survivability," says Larry Morrissey, senior director of global supply management at Redback. "ROI is the company gets to go forward."

Others plot it out more in advance, but even here ROI isn't necessarily the driving force. In 1998, Glunz & Jensen, a Danish prepress equipment maker, decided to buy Parametric Technology's Windchill, a collaboration software product that creates and manages computer-aided drawings and designs. The project's original inspiration was the need to satisfy Japanese customers who complained of mistakes — mistakes that were traced to recreating similar documents 13 times, he says. However, after doing an analysis, the company saw that Windchill could save 4.9 percent of the time it took to complete projects, says Jens Thorup, director of research and development.

In other cases, companies may be underestimating the returns that some software brings. The Yankee Group plans to release a study soon that says collaborative commerce applications are at least as efficient — and probably more efficient — than transaction systems, the original foundation of e-commerce.

Collaboration has been more of a trend than a market so far, but early adopters are saving significant amounts of money, says Jon Derome, an analyst at The Yankee Group. For some it's as little as 2 percent, but for others it can range up to 12 percent. "There seems to be an opportunity for companies to generate significant efficiencies by focusing [more] on collaboration and rich information exchange than simply buying and selling," Derome says.

Sometimes companies can't count on getting the returns they want from a single piece of software. "It's more the bigger picture," says Celestica's Uhlich. About three years ago, Celestica began exploring how to use the Web to coordinate its manufacturing business. It began with trying to meet customer demand for self-service data access and automating some transactions that were not being handled efficiently through electronic data interchange. As more users came, Celestica wanted better control of its branding and the ability to display a consistent message, so the customer service pilot project evolved into a full-fledged customer portal.

About two years ago it introduced a supplier portal to coordinate information like shipment status and supply chain forecasts. It also wanted to reach a greater audience of suppliers and to obtain price quotes. As it moved toward real-time transactions, it needed more ways to share information, so it added collaboration capabilities on the customer and supplier portals.

Celestica is still adding software to address its needs. Collaborative planning and forecasting drives time to market, so it remains a focus of the company's software investment, as does supply chain synchronization, Uhlich says. With a critical mass of applications working together, Celestica now has "the cohesive, single face to the partner community" that it wanted from the start.

"It's a journey," Uhlich says.