ROI is Dead – Long Live ROI!

For years, organizations have been chasing the holy grail of “ROI on IT investments”.  The typical approach has been focused on the TCO (“Total Cost of Ownership”) methodology, wherein one measures the current annualized cost of the IT environment, the future/anticipated (and presumably lower) annualized cost of the IT environment, and then seeks to calculate whether or not the lower anticipated “run-rate” returns value over and above the cost of the IT investments made to achieve it.

Boiled down to its essence, what the TCO approach generally does is put a boundary around IT’s “direct costs” or “hard costs” – the set of things which appear in the IT budget, including hardware, software, and ongoing IT labor – but excluding any factors which do not directly correlate to IT spend.

For IT-centric questions, this TCO approach may still be valid.  The problem is that, as IT seeks to become a “strategic enabler to the business”, a pure cost focus may no longer be entirely meaningful.  Rather, cost becomes just one of the interesting variables in the equation.  In our opinion, other key variables are centered around business impact:  Agility (how quickly can IT respond to business needs and changing business conditions?); Quality of Service (how well does IT deliver against its service commitments to internal and external customers?); and the question of Governance, Risk Management and Compliance (how well does IT protect the business against regulatory issues, audit requirements, threats to business continuity, etc?).

In that light, the ROI question becomes both significantly more compelling, and significantly harder to quantify.  More compelling because business alignment is a critical success factor for many IT organizations; as Peter Weill and Jeanne Ross wrote in “Six IT Decisions Your IT People Shouldn’t Make” (Harvard Business Review, November 2002), a company must “clarify [their] strategy, then ensure that all [their] IT decisions support that strategy.”  Put simply: IT’s goal has to be about helping the company achieve its business goals.  Reducing TCO is a part of the answer, but it is not the entire answer.  At the same time, the non-cost impacts on ROI are harder to quantify because those “other parts of the answer” can be very difficult to calculate on a generalized basis. 

Consider an example of “backup and recovery”.  There is no question that a robust backup-and-recovery solution costs money to implement, manage and support (representing an increase in IT spend).  But, if that same backup-and-recovery solution mitigates or eliminates the need for users to spend countless hours of non-IT time recovering or rebuilding lost data – a cost which is not reflected in the IT budget – doesn’t that solution have “business value” beyond the boundary of the IT budget?    Assuming it does, how do we calculate the “cost” of lost data and the “benefit” of lessened exposure to data loss?  And, would the calculations be different for a highly-centralized manufacturing plant than for a highly-decentralized retail chain?

Or consider another example: in the context of emerging “optimized desktop” scenarios, the ability to implement a standardized-but-flexible desktop through any of several virtualization approaches may cause an increase in (for example) infrastructure costs, as a result of shifting client workloads and associated IT labor into the datacenter.  That may represent an up-tick in “client TCO”.  But when we consider the overall impact of such an approach, the impact may not only return benefits to the IT organization (operational efficiencies, manageability and support), but extend to the business as a whole in the form of organizational agility, quality of IT services, and ability to mitigate risks.  As a result, the incremental IT spend has enormous potential to return superlinear “business value” to the organization, outside the boundaries of the IT budget.  We don’t yet know how to measure some of those value components, but it is clear that the “ROI” of such a scenario is not just about “reducing TCO”.

My name is Bruce Gary.  Within the War on Cost team, I focus on the ROI impacts of client scenarios, including “rich client” and “optimized desktop” scenarios.  I want to take a second to thank Erik for starting this blog, and I also want to give the reader fair warning: my future posts here may at first blush appear to be a random assortment of thoughts ranging from crisp data-supported guidance to stream-of-consciousness musings on emerging scenarios and trends that intrigue me.  Across that spectrum, though, I’m hopeful that the reader will gain some “value” and will, in turn, engage us in dialog that provides a positive return on the investment of your time here.  I can’t help but think that will benefit us all.



Comments (3)

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