Market Analysis: Motivations for Utilizing ROI Analysis in IT Purchasing
One Trillion Dollars Spent
U S companies in the past ten years have spent one trillion dollars on information technology (IT). Yet there has been only marginal improvement in the productivity of more than 60 million American white-collar workers. IT expenditures now exceed 2% of the Gross Domestic Product in the US, but the net economic contribution of IT has yet to be realized.
This is not a phenomenon limited to the US. Sweden invests between 10 and 15 billion dollars per year in IT. Recently, the Swedish government determined that 70 to 80 percent of these investments failed to generate projected benefits.
As a result, more and more companies are beginning to question if yesterday's technology investments paid off. If they did not, what's to say future technology purchases will perform any better? This means that the selling scenario that once focused on "speeds and feeds" and "bigger is better" is over. Customers are looking for IT solutions that provide a competitive advantage. The only way to measure effectively the impact of these solution-driven sales is through some sort of quantitative analysis.
How Do You Measure Return?
R eturn On Investment (ROI) is the most common method to quantify the costs and benefits of new IT initiatives. A study published by InformationWeek found that 82% of organizations now require some form of Return on Investment (ROI) analysis prior to approving any significant new IT purchase. Unfortunately, 68% of those companies surveyed do not have any formal ROI measurement policy or procedure in place. They understand the value of ROI, but they simply have no means to effectively measure it. The InformationWeek study also reported that, for those companies that do not have formal ROI measures in place today, 23.2% expect to have them present within 12 months. Additionally, almost 80% of respondents believe measuring the ROI of IT projects is useful.
Effective ROI Measurement
W hy has effective ROI measurement for IT been so difficult to establish? Largely, because ROI has been confined to financial planning and accounting professionals. It is not particularly hard to use, or understand, but if not practiced frequently it becomes a difficult, if not foreign, concept altogether. What are the challenges for companies trying to measure the ROI of IT projects? Respondents to the Information Week study suggested the following:
Clearly, the importance of planning and measuring investments of any type is not in dispute. The vast majority of companies see the benefit of making their IT investments based on some form of rational financial analysis. Unfortunately, most companies are not equipped with the tools to measure ROI.
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