Debunking the myth of ROI from IT
Andrew McAfee, an Associate Professor at Harvard Business School (whose
blog is recommended reading for anyone interested in the impact of web 2.0 behind the firewall), recently
posted what I found was a thought-provoking piece on building a business case for IT.
He refers to the work of Bob Kaplan and David Norton and their book
Strategy Maps, in which they discuss how organisations can turn intangible assets - including IT - into tangible business outcomes. The essence of their argument is that you can't measure the value of such assets separately and that they don't directly impact on financial outcomes: their impact is indirect as a result of
"cause-and-effect relationships". It's worth reading the article in full but here are a few of the highlights that got me thinking:
I’ve probably seen hundreds of business cases that identify the benefits of adopting one piece of IT or another, assign a dollar value to those benefits, then ascribe that entire amount to the technology alone when calculating its ROI. The first two steps of this process are at best estimates, and at worst pure speculation.
and
A company invests in a new assembly line because it needs more widget capacity. If it had that capacity, it could make and sell more widgets. The relationship between costs and financial benefits in this case is complicated in some ways (it depends on many factors, some of which must be estimated) but the cause-and-effect chain is a short one, and one that doesn’t depend on lots of contemporaneous changes.
With IT, cause-and-effect chains are often quite long, e.g. successful CRM adoption integrates the information about customer purchases across multiple channels - phone, web, store, etc. This information allows stores to accept returns of good purchased online and lets customer service reps see each customer’s entire order history. Both of these can increase customer loyalty, which in turn increases sales. Sales can also be increased if recommendations presented to the customer on the website take into account purchases made at the store.
Andrew is not suggesting organisations should cease building business cases. The costs can be calculated but instead of relying on ROI to compare those costs with the capabilities acquired, simply ask the business sponsors:
Most of the executive teams I’ve worked with would have little trouble answering questions like "Is it worth spending $1 million and tying up the following resources for the next sixth months so that we can capture all customer contacts in a consistent digital format?" or "Is it worth spending $3 million so that over the next two years we can give all of our field sales people automated heads-up alerts whenever the business intelligence system predicts one of their customers is likely to defect?"
I don’t mean to imply that the answers to such questions are always "yes." I simply mean that most business leaders can quickly answer them because they’re posed in familiar terms— as cost vs. capability tradeoffs.
Makes a lot of sense to me. Of course, this depends absolutely on a common language between business and IT, so that those capabilities are "
posed in familar terms". In the example, there's absolutely no point talking about OLAP, MDM and BAM. It's about capturing customer contacts and alerting sales people as part of the real business processes.
