Big Return on Investments (ROI) from IT Projects- Reality or Hype?
I have sometimes witnessed puzzled looks on faces of customers while presenting business cases with big Return on Investment (ROI) projections.
I am writing to share my experiences in an attempt to identify common themes for creating authentic and convincing ROI models and business cases.
Actually, I have a hidden agenda as well. I am helping to update SAP’s web-site on value management. So, in addition to your feedback on this blog, I am seeking suggestions for topics for this web-site.
This project has a big ROI- so what?
Over the last 20 years, I have developed business cases and ROI calculators for IT projects, based on SAP as well as other solutions. The projected customer savings and ROIs have ranged from low and modest to really huge (of course depending on a bunch of factors such as customer size, current state of business operation, etc.).
Often customers do not trust the projected benefits running in tens of millions of dollars per year… or a 100 BILLION DOLLARS (just kidding.. that last number was inspired by an Austin Powers movie 🙂 )
Consider following examples (numbers rounded off to maintain customers’ confidentiality).
- Large Investment: SAP based global transformation program. Expected annual benefits over 100 million dollars
- Medium Investment: e-Procurement/ SRM Project. Projected annual ROI- over 100%
- Small Investment: Custom Application Development project based on one of the SAP pre-built solutions. Projected annual ROI – Over 225%
Interestingly, the above numbers were all reasonable and realizable for those specific project situations. The challenge in fact was in convincing the customer, and demonstrating that these were not consultant “hyped up” numbers.
Building convincing ROI models
Here are a few suggestions:
- Do not give in to the temptation/ inclination to include the most optimistic numbers, while building the model. If appropriate, provide a range of estimates, e.g., low/medium/high or conservative/ likely/optimistic
- Estimate the costs based on recent data, and build enough contingencies for any unforeseen events
- Use benchmark data from similar projects, preferably from the same solution/ industry
- Research, analyze and establish benefit-drivers and KPIs that are relevant to the project/ solution. Typical benefit categories include labor efficiencies and incremental revenues. Then, there are benefits derived from unique functional features of the proposed solutions such as SAP HANA or SAP Mobile Solutions, which must be carefully analyzed
- Use a top-down or a bottom-up approach, as appropriate for computing benefits. Then, slice and dice the available information and present a logical reasoning to build/derive benefits
- Avoid making sweeping assumptions because it makes ROI model error-prone and also leaves your customer un-convinced
- Resist the urge to quantify every benefit category. Classify these non-quantifiable benefits as “qualitative” or “soft”
- Suggest ways to realize benefits while making sure to minimize business interruptions. For example- The labor efficiencies as a result of a Supplier Relationship Management (SRM) deployment can be realized, not necessarily by cutting the number of buyers, but training/moving them to value-added roles such as contract specialists.
See the big picture
It is important to understand that building Business Case/ ROI is only one activity during the discovery phase of the Value Management lifecycle. SAP defines value management lifecycle phases as “Discovery”; “Realization”; and “Optimization”.
ROI/ Business case is not just about number crunching, but also suggesting smart and cost-effective strategies for IT projects. In an earlier blog, I had explained how SAP SRM Rapid-Deployment Solutions can be used not just to reduce time to implement, but also to help realize good Return on Investments.
Lastly, creating a value management mindset is very important. SAP Value Academy helps promote adoption of value management among SAP customers.
I am a Sr. Principal with SAP’s Business Transformation Services group. Prior to SAP, I worked at a large consulting firm as Partner and management consultant. Please respond to this blog on SCN. You may email me privately @ firstname.lastname@example.org