Computing Return on IT (ROIT): The Holy Grail of the Business Value of IT
Technology organizations on the Street are both committed to and passionate about leveraging technology for competitive advantage. In fact, in the financial services industry today, technology often is the product.
In essence, the firm that can leverage technology to the fullest in conjunction with innovation and superior product development and execution will have superior technological competitive advantage. Further, the firm that can sustain this position and leverage the technology-business performance linkage will likely be in a position for ongoing dominance. Doing so, however, requires that the enterprise itself become "IT savvy" -- that is, understand technology-business leverage principles in both the business and technology communities.
Firms seeking such technology-based competitive advantage need to focus on their "Return on IT," or ROIT. ROIT is measured in the context of IT's contribution to short- and long-term goals, such as growing/protecting revenue, reducing/avoiding cost, managing risk, product leadership, fostering (and understanding) customer relationships, and enabling operational excellence.
The development and successful use of the ROIT measure will ensure that business and IT management are able to understand current IT investments in business outcome terms, detect and assess the optimality of its IT investment level (is there a need to further invest in single areas to attain IT investment critical mass?), and benchmark its IT investment strategy and ROIT against the competition.
Computing ROIT
The quantification of ROIT requires seven distinct steps:
Step 1: Understand the business strategy. What are the plans for growing and protecting revenue/profitability?
Step 2: Assess the IT "pressure points" that enable this strategy and perform an overlay on the key strategic areas (e.g., revenue growth, closing competitive gaps, entering new markets, etc.).
Step 3: Determine the competitive technology levers for each pressure point, such as operational efficiency, information effectiveness (e.g., customer information/intimacy) and strategic differentiation.
Step 4: Assess the relative contribution of each IT lever to the strategic goals in business terms, such as growing revenue, reducing cost, managing risk, etc. Make this determination by assessing the differential contribution of IT over base organic growth.
Step 5: Compute ROIT by calculating contribution versus IT investment. Overlay the risk profile -- both IT and business -- with regard to outcomes.
Step 6: Determine the optimum IT investment mix by performing scenario analysis.
Step 7: Implement and track the investment strategy. Integrate it with new strategies and refine (essentially, go to Step 1). Test competitiveness via benchmarking.
ROIT in Practice
As an example of computing ROIT, let's consider the case of a traditional wealth management business. The business has developed a new vision for a future model that features a number of substantial enhancements over the current state: the customer will be bound more to the firm than the individual financial adviser, the financial advisers hired in the future will be lower cost, advisers and clients will have a broader suite of products available, and operational efficiency will be far higher than the current state.
The business is betting that technology will be a key enabler of this transformation by providing more capability to the customer and lessening the importance of the financial adviser. (For simplicity, assume that technology investment enables 100 percent of the revenue differential.) The ROIT is the change in business performance enabled by the additional technology investment divided by the differential technology investment (the difference between the current technology investment plan and the technology investment required over the planned transformation period).
The overly simplified sample computation, above, illustrates that for this particular example, the ROIT for the new business vision is 172 percent. Although this is not a guarantee of a return on investment, the figure can be used as a basis for ranking investment options: How does the potential return from other technology investments compare with that of this investment? Of course, risk and other considerations also must be factored in to yield a complete picture.
But making ROIT work is more than just performing a single computation. It requires developing, implementing and sustaining a fully transparent technology economics investment model that:
- At a product level identifies and quantifies the contribution and leverage that IT provides in support of product profitability. To what extent does IT differentially provide business process operational efficiency, informational value or strategic advantage in support of product profitability, market share, growth and risk management?
- At a cross-product level identifies and quantifies the contribution and leverage that IT provides in support of overall operating efficiency, customer-centricity and risk management.
- At an IT infrastructure level illuminates the linkage between business products/processes and the use/consumption of IT infrastructure resources.
- Enables surgically precise IT investment placement through ROIT to maximize company performance beyond that of competitors.
Perhaps the most critical of the success factors required to meet these objectives is to ensure that the principles and underlying models of the firm's technology economy are fully communicated and understood in the IT and business communities. With this culture in place, the enterprise will be able to continuously and collaboratively leverage this knowledge -- and evolve it -- in its decision making, planning and processes as a unique and powerful business performance lever.
The point is not that this is the ultimate return on IT investment model -- rather, the point is that organizations must begin to quantify more than the expense side of their technology investments. They must begin to quantify the impact of their investments in terms of potential outcomes and use such information to make more effective investment choices.
Considering the differential impact of a new technology investment in the context of the current business trajectory -- and how such an investment may change it -- requires making assumptions and projections as to how IT really causes business outcomes. Some will say that too much conjecture is involved and not attempt this approach. Others may be bold enough to try it.
We are at any early stage in technology economics. There is not a lot known about cause and effect. But testing the waters with new ways of measuring ROIT is a way to create knowledge and is truly a base for learning faster than your competitors. And that alone -- if Peter Senge (author of "The Fifth Discipline: The Art and Practice of the Learning Organization") is right -- takes us on the road to the holy grail of IT investment.
7 Pillars of Making ROIT a Useful Tool
1. Adoption of an enhanced "run the business/build the business" model providing advanced transparency with a focus on the value levers of technology in terms of business contribution -- protect revenue, grow revenue, avoid cost, reduce cost, market innovation/leadership, compliance/risk management, etc.
2. Creation of a strategic technology-business scorecard based on key performance indicators (KPIs) that provide a window into technology performance by linking to business performance objectives with underlying status and progress indicators.
3. Development of a complete model/schematic detailing product business performance (profitability, growth, risk, etc.) tied in two dimensions to business processes and IT value.
4. Formulation of an ROIT current-state map showing at a product level current "coverage" of IT investment in supporting product-level operational efficiency, product leadership/differentiation and customer intimacy.
5. Construction of a product-level consumption and resource model linking products to applications to IT resource consumption and highlighting key capacity planning drivers.
6. Implementation of an overall IT investment portfolio management process that allows modeling of IT investment strategy and assessment of alternative strategies in pure business terms.
7. Establishment of a full communications program to broadcast and share the concepts across the enterprise.
Howard A. Rubin is the founder of Rubin Worldwide, a research and advisory firm focused on the economics of business technology. He can reached at [email protected]
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