If you have read my posts in the past, you will know that I advocate the use of the following formula for determining the ROI
for any given improvement project (whether IT-related or not):
- ROI = Return on Investment
- delta-T = Change in Throughput, and Throughput is defined as Revenues less Truly Variable Costs (TVC)
- delta-OE = Change in Operating Expenses
- delta-I = Change in Investment
Incidentally, where there is no change in I (Investment, including changes in inventory) or the change in I is negative, then projects can be compared based on profit alone. That formula is simply:
However, here’s what far too many IT project’s ROI calculations look like:
The common excuse
The common excuse for not calculating an ROI for an improvement project is that changes in Throughput and changes in Operating Expenses are “too hard to estimate,” and “if they are estimated, they will be wrong anyway.”
This argument is specious on the face of it. Think about it!
The $200,000 estimated “cost” or “investment” value of the project is likely to be wrong, too. But that does not keep the CIO and CFO from making their best efforts to calculate
The Real Reason
Of course, the real reasons that CIOs and CFOs do not take time to calculate a real and measurable ROI for their IT (and other) improvement projects is likely two-fold:
- Too many CFOs and CIOs are under the wrongheaded impression that the value of IT (or other improvements) is both “automatic” and “cannot be measured.” When it comes to new technologies they have succumbed to the strange notion that new technologies are like an engine additive for business—you just pour them in and somehow your business will run smoother, faster, longer and get higher mileage! And, just like people who buy engine additives, they never take time to calculate whether there was any real benefit from using the product.
- They have never taken time to actually determine what root-cause they are attacking with the IT (or other) improvement project, so they do not really know whether the project will actually lead to increased Throughput or will, in fact, drive down or hold the line on Operating Expenses. In fact, they probably do not even know what the “weakest link” is in their customer-to-cash stream or whether that weakest link is internal to their organization or whether it lies somewhere outside their organization in their supply chain.
Isn’t it time to stop that kind of folly? Can businesses still expect to thrive and grow without taking a sound look at how and why they are spending their most valuable resources—time, energy and money?
I don’t think so.