ROI: Now It`s for Real - Creating a definition (
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A lack of clarity about what ROI is and how it should be measured is one of the biggest stumbling blocks in the ROI discussion.
“One of the problems is that ROI, unlike temperature, has no fixed definition of how to calculate it and what’s to be included in it,” Hayes said. “It’s up to each vendor, salesperson or customer to define it for themselves. Anytime that happens, you have got a problem. I’m not surprised at the skepticism out there among customers.”
To address the need for standardization in calculating and communicating about ROI, Avnet turned to Chapter 8 of “Intermediate Financial Management,” a popular textbook on how to make a replacement investment decision. Using the book as a guide, the distributor has created a framework for clearly defining the benefits and potential returns of IT projects in a way that the people holding the purse strings can understand, Hayes said.
Based on the customer’s existing IT infrastructure, Avnet’s ROI formula takes into account the real costs of things such as electricity and physical space and compares them with the cost of the new technology, including its energy use and other factors.
“When someone comes to a financial manager with a new technology that is more efficient and wants to incorporate that technology into the IT infrastructure, this gives a concrete way of calculating payback and return,” Hayes said. “Where so many people go awry is that they are comparing apples and oranges. They don’t consider the existing technology that is in place and the expenses associated with that [for example, depreciation and personnel], and that if they took cash and spent it, they would realize a return.”
ROI calculations also should involve a variety of soft benefits, including productivity enhancements, which are unique to each customer, said Barry Sinclair, product manager for Hewlett-Packard’s BladeSystems. “These soft cost savings are much harder to quantify and can only be part of a general discussion.”
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