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August 12, 2006

Should we measure the ROI of IT?

Imagine not knowing whether spending on IT had any beneficial economic impact.

Should we measure the ROI of IT? Of course we should. But first we should learn how.

The ROI of IT is not difficult to understand. Confusion often begins with a poor articulation of the so-called "justification" for spending on technology. It's convenient to think of the justification as being synonymous with the return, but that hasn't prevented corporate America from deciding that it doesn't know what the ROI of IT is, has it?

The way out of the usual confusion is as follows:

1. Begin by understanding that you are spending on an *effect*, and that the technology is just a means. As the famous saying goes, "people don't buy drills, they buy holes."

2. Understand that "means" are not the same thing as "causes"... Despite automation, people decide what tools do. Decisions will either subvert or support the desired effect. Decisions create or destroy ROI.(See various writers, notably Paul Strassman, on the subject "Return on Management".)

3. Naturally, if the means have poor quality and are unsuitable to the task, they will inject either compensatory or remedial costs that will lower the potential overall economic benefit. But this "lowering" is because the potential extra cost of using the lesser-quality means is really a resource taken away from other more viable investment options. Returns are not found in budgets. Returns are found in portfolios.

4. Understand the actual role of IT. IT is simply a player on the bench. The game is won by the value of the plays. If you give your players the right assignments, then the play is run well and the impact of the play moves you to the goal. Assume that a poorly designed or inappropriate play will waste even a great player.

In sum, understand the difference between having IT that is good enough to enable the execution of the play, versus having plays good enough to win. You must invest in both, not one or the other. But IT does not cause the win. Except as regards IT's affect on the play, you cannot measure the ROI of IT with arithmetic; and since spending on IT is not usually the same decision as spending on strategy development, the correlation of IT spending against revenue or profit deltas is actually arbitrary for companies weak on strategy and IT architecture.

Posted by Malcolm Ryder at August 12, 2006 10:16 AM

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