ROI: Now It`s for RealBy Channel Insider Staff | Posted 2008-05-05 Email Print
Return-on-investment calculations may have been more about marketing than substance in the past, but increasingly customers want solution providers to produce provable numbers.
In the alphabet soup of acronyms that bloats conversations between solution providers and customers, "ROI" is arguably the most common. But moving the return-on-investment talk from supposition and hopes to a provable, statistics-based figure is far from an exact science.
ROI is not a simple equation; it takes many factors into consideration. The short answer is that ROI calculates how much profit or cost savings is realized by the given use of money in a company. However, ROI considers an IT purchase’s TCO (total cost of ownership), which includes the cost of hardware, software, services and upgrades as well as the cost of the in-house staff and/or consultants who provide training and technical support.
ROI also takes into account related savings, such as in utility costs and the physical space occupied by IT equipment, as well as "soft benefits" such as employee productivity and potential timesaving.
It’s easy to see the difficulty in producing airtight calculations, but as IT budgets tighten and financial pundits predict a recession, customers are getting more demanding about the substance of ROI promises.
"As times get tougher, projects get more scrutinized, and if you can’t justify the cost, you are dead in the water," said John Hayes, manager of consolidation solutions for Avnet Technology Solutions’ HP Solutions Division.
"We used to have to do without perfect numbers—and we’d figure that if we’re 50 percent right, we still have a good number," said Bret Osborn, vice president of sales at solution provider Lilien. "Now, we have real numbers, and when we use those tools, it’s really effective. Evidence defeats doubt."
Even so, while customers expect solution providers to make a good case for ROI, companies often lack good metrics for determining the value of their IT environments. Only six of every 10 companies have measured the business value of IT efforts, according to a 2007 study by CIO Insight, a sister publication of eWeek Strategic Partner. Meanwhile, 64 percent of IT executives surveyed said it is difficult to calculate IT ROI. The study also found that, on average, only 41 percent of companies’ IT budgets undergo an ROI assessment.
This reality, however, doesn’t stop customers from asking solution providers for ROI analyses. In a February survey, Ziff Davis Enterprise’s research unit found that 28 percent of CIOs are looking for more ROI analysis from their solution providers. Only 11 percent of the CIOs surveyed said their providers already give them ROI analyses.
This shows that solution providers cannot afford to skirt the ROI conversation with customers. If anything, providers say, they must make every effort to define ROI clearly so they can produce solid analyses for customers.