Title: What's in IT for You (and Your Company)? Show off Your ROI Skills by Sizing Up Your Company's IT Spending
Abstract: EXECUTIVE SUMMARY * The difficulty of calculating the return on an IT investment often has weakened the case for funding such initiatives. * Financial managers and other decision makers expect requests for IT funding to be framed in an ROI or shareholder value format so they can compare them with other investment options. * The successful measurement of IT projects involves evaluating critical resources and processes that produce desirable results and lead to overall organizational success. * It's essential to assign monetary values to nonfinancial IT results. Although some benefits of IT initiatives do not always produce short-term profits, they should reduce costs or increase revenue. * To calculate the return on an IT investment, measure its total costs, including those related to disruptions and risks, as well as its total benefits. ********** In too many organizations, decision makers overlook economic rationality in justifying information technology (IT) spending. Instead they acquire the best and most recent technologies to outpace other companies. The pressure to remain competitive is forcing many organizations to consider a more results-based approach, where the central question is: Will we see a return on investment (ROI)? Large IT, e-commerce and enterprise resource planning (ERP) system investments all face the same challenge: demonstrating their value in light of the historical difficulty of estimating the revenues they generate and their total costs. It typically fails on senior corporate and financial managers to evaluate the payoffs and recommend resource allocations, and CPAs who know how to accurately calculate the return on technology investments can guide them through this process. With CEOs and CFOs demanding accountability for the tremendous investment in IT, managers are required to calculate the ROI and make a bottom-line contribution. Few things are more convincing to top executives than measurable results. IT executives must find ways to measure and communicate the contribution of IT so that existing initiatives are managed appropriately, new projects are approved only when there is satisfactory return and marginal or ineffective projects are revised or eliminated. They need comprehensive systems to evaluate the impact of IT initiatives on financial performance. Typically, the payoffs of IT are not measured, ROI is not calculated and IT investments are not evaluated with the same rigor as other corporate investments. While senior IT managers are convinced they do create value and their initiatives would be significant profit centers if measured properly, they have difficulty proving it. Because CEOs and CFOs lack the information necessary to make well-informed decisions on the payoffs of these investments, most companies seem to focus on reducing the cost of IT rather than maximizing its potential to create value. This article describes a model that CPAs can use to evaluate IT performance and calculate the payoff. Accountants can use it to help CIOs evaluate and justify their initiatives and to assist CEOs and CFOs in making better resource-allocation decisions. THE STARTING POINT Exhibit 1 on page 71 describes the inputs, processes, outputs and outcomes of IT initiatives. An organization's IT success is dependent on inputs. These include the existing corporate strategy, structure and systems. Along with available resources and the external environment, these are critical inputs that affect IT strategies. Other factors, such as leadership, IT structure and systems or processes, also significantly affect the performance and success of IT initiatives. The inputs and processes have an impact on IT outputs, which can be classified as either internal outputs--such as improvement in productivity, time savings, quality or overall cost reduction--or external outputs, such as customer acquisition, satisfaction and loyalty If the IT strategy and implementation are successful, these outputs should result in improved overall corporate profitability--the outcome. …
Publication Year: 2006
Publication Date: 2006-04-01
Language: en
Type: article
Access and Citation
Cited By Count: 1
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot