IT project ROI

Many people, including myself, have asked how you calculate ROI (Return on Investment) for IT projects. There are times when IT projects’ ROI can be calculated just like other non-IT projects. For example, you implement new software to automate a work process to replace the manual work done by employees. Your ROI is the saved labor cost divided by the cost of the project itself (Labor/Cost) either calculated annually or over a period of time, say five years. It seems pretty simple, at least in term of math’s concern. However, IT project ROIs’ are rarely that simple. Usually, you will have one or more IT administrator(s), who’s labor costs are much higher than your data processors’ labor costs, to manage the software, perhaps software annual maintenance costs, software upgrade costs with labor and outage costs (every three to five years at least), support costs with software vendors, along with implementation costs. What about the risk of failing projects? As I blogged before, only about one-third of the IT projects are considered as successful. If you add all the costs up, you will get a totally different ROI. Then the question is how do you justify IT projects?

There are two aspects we need to consider ROIs. Tangible and intangible benefits are both equally important in calculating ROIs. Tangible benefits, such as reduce costs and increasing revenue are much easier to put into numbers. If you reduce a number of employees needed to do the same work, you can calculate the labor savings easily. As for increasing revenue, you just need to add the revenue generated through the new implementation. The more difficult part is to calculate intangible benefits, for example, if the blizzard of the 2010 happened during the final week of Christmas shopping season and you don’t have an e-commerce presents. In another word, the risks of not having something need to be considered as well. Another intangible is convenience, for example check your balance of your 401K can be processed 24x7 on the web instead of contacting a customer service representative during the normal business hours. The trick is how to calculate those intangibles? Often, IT departments are put in charge of calculating ROI that I think it is a mistake and perhaps contributed to the low IT project success rate. Business units are benefiting directly from the IT projects so they should be one in charge of putting intangibles into dollar amount because they know how valuable the convenience is for their customers and so forth. IT department should be put into charge of calculating the cost side of the project since they know how to implement the projects and costs associated with software, hardware, labor, and time needed to implement. By working as a team, both IT and business are better off to get a better understanding of ROI and whether or not the project is worth to pursuit at the first place. I believe it will also improve the successful rate of the IT projects.