By Tim Landgrave
I recently shared a weekend retreat with several CIOs and senior architects. During our sessions, we discussed both the future of IT and near-term survival strategies. Two key themes emerged from these discussions. First, these key IT leaders emphasized the need for detailed return on investment (ROI) analysis for new projects. Strategic value is important, but without quick, measurable returns, it’s not significant. They also agreed that even in downtimes it’s important to continue to build their IT assets tactically even if they couldn’t afford many large and expensive strategic projects. Both of these concepts can be summarized in a quote from one of the CIOs: “Even the most elegant strategic plan cannot be executed without money!” I’ll analyze these themes in more detail and discuss how they can help you to think tactically.
The new ROI
In the past, companies were able to look at a project and consider a three, five, or even seven-year payback for implementing new systems. These leaders agreed that their CFOs and CEOs ask them to justify a new initiative based on benefits derived in the first year of a deployment. Even if you could show that a $1M investment this year would return $10M within 7 years, you still have to have the spare $1M to invest. The kinds of projects that get approved now are those that can demonstrate a short payback on the implementation and additional benefits dropping to the bottom line in the first year. For example:
- The implementation costs $120,000, but over 12 months will save $30,000 each month. The ROI is 300 percent with a 4-month payback.
- The implementation costs $600,000 but will generate $60,000 worth of new revenue each month. The ROI is 120 percent with a 10-month payback.
Obviously, these kinds of returns are difficult to find, but the attendees agreed that the real challenge was to identify the benefits that generate the payback.
How do you define a benefit?
In the simplest terms, a benefit to the business is anything that will either reduce operational costs or increase revenue. These are the hot buttons that get the CEO, CFO, or owner’s ears to perk up. When analyzing the new initiative, the question you have to answer is, “How will what I am doing reduce costs or increase profits for my business?” Many times, these are hard dollar benefits like reduced headcount, measurable reduction in waste, or lower service charges. But most real gains will be measured in soft dollar benefits. These include the creation of new products and services, reducing the time to market for new products or services, an increase in customer satisfaction resulting in customer retention, or additional purchases or increases in employee productivity.
The general consensus of the group was that CEOs considered hard dollars “real” and calculated soft dollar values at half to a third of the value of their hard dollar equivalents. Part of this was pure skepticism, but much of the attitude arose from these senior leaders’ dissatisfaction with the returns promised from prior, large-scale, strategic projects. Most of the CIOs to whom I spoke agreed that new projects needed to be scaled and packaged as near-term, tactical initiatives.
Given the current economic conditions, tactical solutions with a better ROI are easier to integrate into the company’s budgeting process. And if you can demonstrate that the tactical solution gives a faster payback, it’s able to add value to the business more quickly. Doing the work to demonstrate a quantifiable ROI allows upper management to see the answer to the key question, “When will I get my money back?” Finally, a quicker payback minimizes the risk of the project.
Corporations are riddled with long-term strategic projects that were abandoned after millions of dollars of investment. Tactical initiatives with shorter turnarounds are much more palatable to senior management. In fact, some management teams aren’t in a cash position to approve initiatives with paybacks of less than a year but are limited to approving projects that are absolutely necessary. Even these projects should be done with some consideration for future impact.
“Emergency” tactical thinking
Even if you can’t afford to deploy new infrastructure or build larger systems, you still need to build for the future. For example, if you need to create a new interface for a trading partner, use new technology where possible so that when your company begins taking on new large-scale projects, you don’t just throw this work away. All of the CIOs in this group agreed that although they can’t afford to overhaul their existing Enterprise Application Integration (EAI) systems, they have started building Web services interfaces between existing systems. They’re focused on creating Web services interfaces that can be reused by multiple systems as new features are requested, but do so within a framework that will allow consistent implementation. They understand that Web services are the future, and they need to keep their development teams excited and engaged or they won’t have them there when their business picks up.
One CIO shared his solution for a sales force automation problem that demonstrates the “think tactically” mentality. His company wants a distributed order collection system using Pocket PCs or Windows Tablets but can’t afford to build it now. Instead, they created a Web application that allows their salespeople to input the information from home in the evening. It eliminates the faxing and keying process that they use now, which saves them the personnel costs of having administrative help to retrieve the faxes and enter the orders. But more importantly, they built the system with interfaces so that it can be accessed later via a mobile device, allowing them to add remote, real-time entry to the system when it becomes economically feasible. It’s this kind of tactical thinking that allows organizations to move ahead regardless of the economic climate.