Wish we may see less of it in 2010!
I . Nature of RoI
Any one who writes on RoI gets an image of a responsible person.Because he/she seems to profess the idea of not only ‘Waste not!’ but also ‘Gain more than what is spent!’. If the person is one who is proposing some investments and talks about RoI, it is all the more so.The proposal would in all probability get approved.
If the person who has authority to approve talks about RoI,it make us think that he/she is doing his/her job meticulously.
Prompted by some recent blogs,I tried to understand RoI a bit more from a user perspective and found me thinking as follows.
Firstly the terms themselves. Return-On-Investment. Mathematically it would be R/I, a ratio.
It would be expected to be more than 1.0. In actuality it may be Less, More or Equal!
Return is a requirement of any investment. The Return may be direct or indirect.
Direct benefit is expressable in money terms, whereas it is an effort to do so for indirect benefit!
It essentially has a time factor.That is, the Return would be expected within one year of the spending the amount or during a specific number of years from the time of spending.
If the expectation is over a number of years, it would be based on the depreciation percentage. That is if the depreciation % is 25, the number of years during which the Return may be expected would be 4. Similarly it would be for other % of depreciation. But of course, Return would continue to accrue even after these number of years!
It may be said that an Investment is an instance of payment during an accounting year and the Return is a stream of receipts (benefits) during the same or subsequent years.
Hence for a better management, it appears that, as Investment proposals need a good review prior to approval, the Return would require monitoring and measurement over a specific period.
II . Treatment of the the amount spent
Are the amount paid for all these instances would be treated as investment? Generally not.
This question arises in mind because I think that in accounting practice, an amount paid is treated under Revenue account or under Capital account. If it is revenue account the amount would be accounted fully in the year of spending itself. If it is capital account a percentage of the total amount would be accounted for during the number of years according to the percentage of depreciation.
All amounts spent by an organization would pertain to planned or unplanned expenditure.
Naturally in a company with financial discipline most of the spending would be planned and with budgetory allocation. The cash flow would also be a regulated affair, that is evenly distributed as for as possible through out the year.
Under such circumstance I wonder how a ‘huge’ amount would ever be spent, except when a paradigmatic change is planned with sufficient reasons. Generally the huge amount would also be spent in a phased manner only! Hence expectation of Return would only be proportional to the amount apportioned for each year.
III. The special nature and treatment of money spent for IT
In addition, the IT also would arrive in modules composable year after year, forming the grand structure at the end of the planned period!
Another aspect of the spending for IT that comes to my mind is that apart from the requirements, there would be expectations and desire to get ‘Wow’ effect and ‘Aha!’ effects while using the IT, whatever it be, whether HW, SW or Services! We felt so when we moved from mainframe to table top; from DoS to Windows; from stand alone to intranet and internet; from office use to personal use; and it is going on in many other areas and in many ways!
It also occurs to me, apart from accounting perspective that once decided to spend the amount, focus may have to be on deriving the benefits – specified and unspecified – as soon as possible; for otherwise the users would loose interest in it.
Emphasizing RoI, getting it spread over, say 4 years makes RoI appear to be the least that one may aim at! That is meant for the purpose of accounting. It should not be a governing factor; ‘deriving benefit from the implemented IT’ ASAP may have to be the governing factor. When the IT people and the user departments work towards that as the primary goal than seeking RoI,it would be the result.
IV. Return in reality
We can reasonably expect that sometimes Return would be gained and sometimes would not be forthcoming.
When Return is gained it may be less than expected or more. It may even continue for several years.
When return is not obtained within the time period, at times additional amount may have to be spent.
If even then it is a loosing game a time would come to write-off the amount remaining during the year of consideration. Of course in some cases unexpected benefit also may be gained!
Accordingly we may say that at any point of time one may have a combination of a Performing IT, Surviving IT, Struggling IT, Promising IT and Failed IT. If the combined result is more than 1.0, one may infer that the RoI is healthy. But monitoring may have to be case by case to gain return.Is that feasible, each being a different stream, having started at different point of time and existing at different departments? Must be possible by a systematic effort. For investment that is sizable, all the more so.
V. A Guidepost!
What seems a good reference for a systematic effort is the “Information Technology Investment Management – A Framework for Assessing and Improving Process Maturity”.
This document (Revision – 1.1) was published in the year 2004 by the US General Accounting Office as an Executive Guide. www.gao.gov/new.items/d04394g.pdf
The best feature of this guide is that it treats Investment management as a process. It prompts the organization to focus on the process elements thereby to ensure better RoI rather than emphaizing directly.
For this reason it appears worth refering to as a guide by BPX, Business and IT.
In the end I could not escape the thought in our persoal life we do not consider RoI excessively while choosing to buy any IT product and we are happily creative!