The Gantry Group

Confidence to Make Critical Business Decisions

Gantry Group Newsletter Issue No. 19, April 2003

This email is never sent unsolicited. You are receiving this email because you have subscribed to receive news and updates from us or one of our affiliates. If you don't remember opting in, or you think someone else has opted you in against your wishes, please follow "Unsubscribe" instructions at the end of this newsletter.   Issue Insights: ROI is more than a financial exercise: it should becomea decision support tool in your IT purchasing process. Determination  of ROI begins with an assessment of your business goals and objectives. After you have aligned your business processes with corporate objectives, you can ask: will this investment help me achieve my goals? If the answer is 'no', don't bother trying to determine the ROI as it will be negative. Before seriously considering an IT solution, make sure you understand how it will implement business processes enterprise-wide. Gather cost data for your ROI calculation from vendors' customers so you can use actual costs. Do the same with benefits. Collect data on your current and historical performance metrics so that you have a starting point in your ROI model. Try to develop your ROI model before you start shopping for a vendor. Use it to help you with vendor selection.     Participate in our Survey! Exploring IT Investment Experience If we could have one minute of your time, we would like your perspective on your company's IT Investments. We would like to explore your satisfaction level, interest areas and procurement criteria. Please click on the link below to enter the survey. The survey results will be revealed and analyzed in next month's newsletter issue. Thanks for participating! Enter Survey

Enterprise IT ROI Series Editorial Calendar Getting a Handle on Your Enterprise IT Investment How to Buy with ROI - It's Not Just for Sales Pitches Any More Setting Realistic Payback Goals on Software Investments Field Guide for Continual IT ROI Measurement: The Backbone of Today's Enterprise Understanding the Real Cost of Owning Software Where Customer Intelligence Pays Off Determining the ROI Rewards of Business Intelligence Streamlining Supply Chain Automation: Is It Payback Time? Quantifying Customer Service Automation ROI Impact Measuring the ROI of Mobility Technology The ROI of Knowing What You've Got: Enterprise Asset Management Buttoning Down the Hatches: Cost/Benefits of Security Web Application Services: Cool Technology-- But Does It Deliver ROI? The Value of Making it All Work Together: Enterprise Application Integration Economic Impact of Business Process Management Software   How to Buy With ROI ROI  - it's not just for IT technology vendors anymore. Actually, it never was. It's true.  Editorials, analysts and IT vendors alike are all paying homage to the importance of ROI in a technology sale. It's also true that most enterprises today will not sign a purchase order for new IT technology investments without a sound business and payback justification that includes a thorough, credible ROI analysis.  Why? Because the fundamentals and disciplines involved in objective determination of ROI, are prudent, good business practices. In fact, they might just be a key component of what keeps enterprises in business in our stagnant economy. This is why we are urging enterprises to proactively incorporate a set of ROI-based practices into their purchasing decisions and overall procurement process.  While it is commendable that IT vendors are developing objective, customer-based ROI tools for their marketing and sales initiatives, it is important for enterprises to also implement a proven ROI strategy as part of their own IT investment evaluation process. In doing so, a safe, double-check system is accomplished to pinpoint vendor ROI that may be overstated or purposefully misleading. As we will see, this process begins with an understanding of an enterprise's business objectives, leading to identification and benchmarking of your key business performance metrics that will track whether those objectives are actually being met. Aligning the business objectives with process-level metrics will reveal the depth of need, timing and expected business impact of any IT investment under consideration. Sure, it is relatively straightforward to do a cost/benefit analysis. But companies typically do not use a rigorous methodology for integrating the firm's business performance objectives with the decision process for making an IT investment. In fact, the track record of in-house ROI calculations is not good. According to a survey conducted by Jupiter Research, some 59% of in-house ROI studies yield optimistic results. This is partly due to the fact that the ROI justifications are sometimes calculated by an individual or group who want a software solution for reasons other than that the solution is aligned with business objectives. Or, they are simply too close to the project to be objective. In such cases, the ROI exercise is biased because it is intended to "back calculate" to justify a specific outcome. In other cases, executives simply don't have the bandwidth to accommodate the research required to create a solid ROI foundation. As we noted in our last Newsletter (Issue 18), Gantry Group has embarked on a new ROI series. The series is targeted specifically to enterprises looking for guidance about adopting "ROI best practices" for investing in new IT assets.  In this issue, we will detail the development of business performance-based, ROI "benchmarks", and how to use this strategy for evaluating an IT investment that is calibrated with your company's business objectives.

When an enterprise is considering their IT budget today there are at least three people on the team: CEO, CFO, and CIO. Before even considering vendor selection, enterprises would do well to start at the beginning -- where the company reviews its business and performance objectives for the coming 12 - 18 months. Using the rule that an "objective" must be results based, the job now at hand is to decide which tactical activities will contribute to meeting those objectives. Here is where companies must be able to down shift from the high level of corporate and departmental objectives, to the cross-functional business processes that drive the company. It is at this business process level that money is made and lost.

The following graphic depicts some of the steps we are recommending:

Starting with business objectives, executives now need to look at business processes -- not necessarily functional departments, and how they support the desired objectives. When mapping out a business process, it may be necessary to include management from more than one functional department, since processes often do not "recognize" these boundaries.

By identifying and mapping out all the business processes as they are related to achieving each business objective, executives can examine many aspects of these processes, including what tasks comprise the process's timeline, where the organization touch-points and hand-offs occur, where the log-jams tend to manifest, etc. The business process map of a company today will likely extend beyond the confines of the enterprise, with touch-points that include partners, suppliers, vendors and customers.  Once this map is created, executives are then in a position to ask themselves - do these collective processes support our business performance objectives?

Before moving to the next step, there is one more pre-requisite calibration that must occur: do your business objectives and processes align with the reality of what the target market needs and will pay for?

At this point you are now ready to determine whether your business objectives and processes are aligned with the realities of the market. The best way to calibrate the effectiveness of your business processes is to directly ask those parties that are touched by the business process. Many companies conduct primary research with customers and/or prospective customers, to validate the need and value proposition of their offering. By seeking out market facts, companies can better ensure that their plan for the business has a good chance for success. A simple online survey will provide you with a wealth of information from existing customers and your prospect universe.

The quantitative data from these survey studies will shine a spotlight on your business processes. 

• Which of these business processes is mission critical to meeting a market need? 
• Is that process optimized already? 
• Where are the weak areas in the business process?
• Can this process be eliminated?
• Must it be placed? 
• Is there an IT solution that will resolve an identified business process issue?

Not to be forgotten in this validation exercise, are your own employees, partners and suppliers. Like as not, they are involved in the business processes that have been the central focus thus far. We therefore also recommend internal surveys to determine employee and partner satisfaction. Once again, as mentioned above, the data from these surveys will call out the critical business processes associated with problem areas.

Now that you ..

• have assessed the process hotspots
• are in a position to confidently articulate your IT approach to resolving/enhancing these areas
• and have confirmed that indeed their is sufficient business opportunity to justify making the process improvement investment in these areas

... it is time to broaden your process review to reexamine your current business processes throughout the enterprise. The question in the back of your mind as you perform this evaluation is this: Does this business process help me to achieve my objectives? If the answer is "no", you must make the decision about whether the workflow is unnecessary or redundant, and whether it can be optimized to become more effective. If the answer is "yes" then you consider if there are ways to optimize even further. 

The ultimate result of this systematic review of all business processes will drive a specification for any new IT technology you require. At this point, you are ready to document everything that is required to enhance, modify or eliminate your business processes. For each business processes, you will have a checklist of areas for improvement. You will also have a list of performance metrics that will help you to measure the performance of each business process. This check list is your guide for evaluating an new IT solution category. 

Next time you are hearing about some new IT solution category, you can use your checklist and answer the question: "will this IT solution category help me with achieving my business objectives?"

Now that you know what problems you are looking to solve, you can go shopping for an IT solution. You have now methodically established need for a solution category. However, you still are not ready to bring in the IT vendors for ptiches and quotes. You may have concluded that you "need" an IT solution to streamline a critical business process that will achieve an objective that that market wants, but there is another step in the approach before going shopping.

 Most companies fail to achieve a positive return on IT investments. They fail to:

• Understand the motivations for IT investment. Specifically knowing what problem is to be solved by the IT solution and what financial impact must it have (hurdle rate) for the IT initiative to be deemed successful.

• Assess the business process(es) to be automated by IT. Understand all points of organizational interaction and how each business process will be impacted by the IT system under consideration.
  
• Pinpoint organization'(s) performance metrics and goals. Specifically what do the organization'(s) wish to achieve with the IT solution? How will the solution affect the business' bottom line?

• Fully understand the business delivered by the IT solution category itself, let alone the specific vendor value differentiator within the solution category.

• Fully appreciate the comprehensive cost equation to fully deploy the IT solution. What are the costs related to seamless integration with our corporate infrastructure? What are the costs related to achieving high end-user adoption of the solution?

To successfully buy with ROI means that you must have a rigorous methodology for accurately calculating the costs (initial and ongoing) of IT ownership, and for establishing measurable performance metrics at each major impact on a business process. You may already know at this point where your process weaknesses are. And you may also know now that there are IT solutions out there that promise to specifically address these weaknesses. This means that your next step is to pinpoint the performance metrics for the key points of business impact. Ideally, these should be metrics that are already being measured and for which you already have historical data.

In other words you need to ask...

If I deploy this IT solution how will I measure its impact on my business processes?

If you have already set up performance metrics and are measuring them, you are a step ahead already. What you are now trying to assess is to what degree that performance metric will be improved ( if at all) by the new IT solution category. Calibrating the expected incremental impact of a solution on each performance metric, will guide you to calibrating your IT investments according to an objective assessment of impact.

When you buy with ROI, you ultimately want to be in a position where you can evaluate the expected ROI of each vendor's solution and compare it with your own corporate hurdle rate or benchmark. But if you have never implemented the IT solution before, how can you project what a reasonable ROI would be for your specific implementation?

If you have gone through the steps described above, you will now know the problem areas in your business processes -- these are your value drivers. In order to do an objective comparison among solution vendors, you need to quantify these value drivers. You need to know how much of an improvement in a problem area you require to offset the costs of ownership. There is sufficient enterprise performance data available for most IT solution categories to clearly indicate the following:

• Cost of ownership - estimate  cost of initial purchase, upgrade and ongoing maintenance.
• Quantified value proposition - establish a benchmark for current performance metrics and assess what kind of improvement is necessary for you to get at reasonable return.
• Realistic payback period - establish expectations about when you can recover your investment.

Before you do anything, take the time to compare the expected benefit of the IT solution category, with the needs of your organization. If there is no clear way that your business will benefit from switching to, say, a J2EE platform, why incur the cost? Once you understand the true value impact of the category, you can then decide if the IT solution is aligned with your corporate goals and performance metrics.

At this point you can either head out with your required ROI improvement, or you can go one step further. With the solution category previously validated against your corporate performance objectives, the discovery is now to isolate the IT vendor with the most aligned value metrics and highest ROI. You are now armed and ready to go shopping!

Most IT vendors are only too happy to provide you with names and contact information for satisfied customers. Alternatively, you can go to their web site to get the information there. Either way, the most accurate method for projecting the expected ROI from an IT solution is by talking with experienced customers. Once you find the right people in the reference site's organization to speak with (they are often the ones quoted in a vendor case study), it is generally not too difficult to validate actual costs, time to implementation, infrastructure costs, training fees, etc., as well as find out what kind of process improvements the customer has experienced as a result of implementing the solution.  If you are lucky, they might even be tracking their own ROI on the investment. In any case, taking the time to speak with real customers about quantified business performance metrics will enable you to validate your own assumptions and tune the quantification of expected benefits.

While it may once have seemed that the world of IT was confusing, crowded and daunting unapproachable, you now have a template for taking more control of the situation. You now have a means to rigorously assess whether in fact a certain IT solution will benefit the performance objectives you are trying to achieve. If you are comfortable that your assessment is correct in pointing toward a particular IT solution category, you also can construct a set of ROI guidelines based on real customer experiences. You can then use these guidelines as part of your vendor selection process.

To summarize: the main steps to buying with ROI include having:

• Clear corporate vision and objectives - Clear prioritized corporate performance goals.

• Clear reading of user needs - Clearly articulated internal/external user needs. Accurate translation of User Needs to Solution Requirements.

• Clear solution vision and objective - Prioritized, realistic objectives based on greatest ROI opportunity and need. Quantified success and payback metrics for company and users.

• Solution blueprint -- a comprehensive IT plan of what to build and buy. This will enable sound make/buy decisions. It will also drive a thorough evaluation of IT vendor brand selection based on corporate goals and user needs -- instead of brand awareness and strength alone.

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