ROI calculators: Honest projections or fuzzy math?

Find out how ROI calculators are giving CIOs tools to make spending cases in front of corporate budget watchdogs.

In a tight economy chief information officers are increasingly being asked to provide hard evidence that new technology investments will deliver guaranteed levels of return on investment (ROI). As a result, tools that help build a business case and illustrate those returns are growing in popularity.

Most often referred to as ROI calculators, these applications are being released by everyone from independent third-party outfits to technology vendors themselves. And while this sudden influx of tools gives the average CIO the ability to make a spending case in front of corporate budget watchdogs, there remains a debate as to which ROI calculators -- if any -- are the most credible.

Nowhere is this demand for measuring returns greater than in cutting edge technology arenas such as e-business or customer relationship management (CRM). After all, it can be difficult to quantify the so-called "soft" returns on investment that come with applications that make your customers happier and more loyal.

"If you can relate some kind of hard measurement to the soft calculation, the whole ROI proposition makes more sense," said Alex Soejarto, analyst at Stamford, Conn.-based Gartner.

A typical ROI tool resembles a souped-up spreadsheet with drop down menus allowing users to add and subtract factors that could affect the outcome of a project, including implementation cost overruns, staff reductions and improvements in technological reliability. To Soejarto, it is the number of options a user has in introducing possible scenarios that separates the reliable ROI tools from marketing ploys.

"Assuming that you've got the right financial numbers in place, a good calculator would let a client quickly change assumptions and see if their business case is being built correctly," the analyst said.

Two ROI toolmakers targeting end-user customers, consultants and technology vendors share this viewpoint.

Tom Pisello, a former Gartner analyst, is CEO and president of Alinean, Orlando, Fla., a company designing ROI calculators for technology vendors that also plans to release an end-user tool next month. Pisello said that any worthwhile tool should combine a basic financial framework with the ability to create a wide variety of "what ifs" and some method of gauging soft ROI. Less worthy offerings, he said, rely on defaults and assume that every organization will realize the same financial benefits.

Pisello, whose customers include Hewlett-Packard Co., Novell Inc. and Microsoft Corp., said challenges like predicting the adoption curve of an e-business application make it tough to derive a truly accurate measurement of returns.

Another independent firm building ROI tools, primarily for end user companies, is Boxboro, Mass.-based CIOview Corp. Scott McCready, president, agrees that flexibility is the key element of any accurate tool.

"Especially in the case of vendor tools, if there's any black box component, or if you can't change the assumptions, run, don't walk away, because you need robust analysis if you're going to be on target," he said.

Part of CIOview's thrust is designing calculators around specific applications, rather than for a particular company's needs. However, the firm does count technology providers among its customers, including Ariba Inc., AT&T Corp. and IBM Corp. McCready said his company charges a one-time ranging between $499 and $3,500 for its ROI calcuators and includes incremental updates to reflect changing costs.

By the end of the year CIOview hopes to offer more than 100 different application-based ROI tools, up from its current total of 40.

Yet some experts remain leery of how much faith can be put into any ROI calculation. Albert Pang, analyst for Framingham, Mass.-based International Data Corp., is predicting that ROI tools will only remain fashionable for several years -- until IT spending picks up again. Pang also points out that some calculations are impossible to make with any real accuracy.

"This kind of estimate can't ever be seen as fool proof with areas like e-business in particular," he said. "There are so many variables. The products out there are still so immature, and integration costs often indicate how successful any implementation will be. At the end of the day it is still very much a matter of conjecture."

He also questions whether you should trust a tool coming from a vendor eager to make a sale.

"If the numbers prove unsatisfactory, they're probably not going to show [them to] you," Pang said.

This was first published in February 2003

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