When Dick Wilson, principle accountant at Durham county council was selecting reporting tools, the last thing on his mind was a return on investment.
He was much more concerned about ‘making a worthwhile contribution to government requirements and reducing the 40,000 or so pieces of paper,’ generated by the council every month.
Wilson is typical of the class of software buyer for whom survival or hygiene factors weigh heavily in the scales of IT procurement decisions.
And while these remain significant spend motivators, they are not enough to keep software application sales at a healthy level.
Over the past 18 months, there has been significant pressure on IT departments to deliver value for money, with a corresponding increase in the number of pitches that include some sort of return on investment play as the support justification. The problem, as many have discovered, is that ROI is a tarnished concept.
One view is that it has been hijacked by the software industry as part of its insatiable appetite for the latest three-letter acronym and therefore it’s possible to attach many meanings to the term.
Damian Traynor, global marketing director at SunSystems, for example, believes that payback is just ‘an accountant’s term for ROI and there’s very little difference in their meanings’.
A more considered discussion comes from Comshare’s head of new business development, Terry Redding. The company provides analysis and reporting tools that are usually directed at the finance departments. He identifies a number of methods of justifying investments that can be loosely grouped under ‘ROI’.
These include reduced costs, time to payback, reduced headcount and improved cashflow. However, he does touch on what seems to be a critical issue in the decision process: ‘Many people get stuck on cost reduction but we think this is too narrow a definition. Today’s software does a lot more than that.’
Mark Stimpson, vice president of international marketing at planning tools vendor Adaytum sees a wider problem. ‘The bigger prizes lay beyond the budgeting and planning process. They come when you start to give people the tools to create their own forecasts as part of a collaborative team.’
Unfortunately, these messages are not getting across.
Tony Whitby, group data manager at chemicals company Johnson Matthey thinks it’s an issue of perception. ‘Finance has no problem undertaking an ROI study for capital investments. But software is different and when they have to do it for themselves, they tend to see it as a necessity that should be delivered at the least cost commensurate with getting the job done.’
For many years, finance has been both the IT gatekeeper and spending controller. It is, for instance, usual to find that finance directors have a watching brief over IT expenditure. This means that finance is used to adopting a reactive stance, where it supports IT decisions based on other departmental requirements.
There does seem to be a cultural problem impacting finance’s ability to make decisions about tools, especially in the field of analytics where finance has a great deal to offer. John Wilkes of SAS Institute puts it this way: ‘Finance has not been very good at building its own business case. It’s not a concept with which it appears comfortable.’
Industry analysts agree that analytical capability holds tremendous potential for delivering real value. For example, in the field of corporate performance, it’s widely recognised there’s a tangible link between financial performance, customer satisfaction and employee motivation. Today, the techniques for understanding how these elements fit together is not well understood and organisations are looking at a mixture of analytical techniques to drive the creation of new measures.
This is a golden opportunity for finance to become proactive because it’s in the best position to articulate how the numbers have meaning for non-financial departments. But it’s a developing science.
Stewart Cooper, general manager of operations at Dunfermline Building Society, says the society has been focused on staff from a customer service perspective that starts from examining the interaction of these factors as it impacts the customer life-cycle.
This has special relevance to mortgage customers where the mortgage term is about to expire.
This is the point where the customer is more likely to switch to another financial institution in an effort to maximise investment returns and has a direct and significant impact on revenue and profitability. Understanding the dependencies and their financial implications is a complex task requiring the use of sophisticated analytical techniques.
The perceived improvement may be part of the supporting calculations, but those calculations will inevitably prove to be wrong. This is part of the reason why vendors find it difficult to get customer approval to work out the post-implementation results.
Matthew Goldsborough, European marketing director at Informatica, notes: ‘Motorola created a prioritised list of problem areas and then went after them based on anticipated results. They recognised that the parameters were probably wrong but it didn’t matter because there were immediate and multiple payback opportunities.’
Motorola’s approach was based on the premise that the company would learn more about its performance in critical areas. The key to success is that the metrics are not used as a way of starting witch hunts among staff and this is emphasised through a partner-ship approach to analytics. But Motorola is unusual because it has not only measured but looked at what happened as a result of running analytic programmes against the forecast results before the project was initiated.
Mike Thoma, vice president of strategy at technology company Actuate, sees the problem of measuring results differently. ‘Once the business case has been justified, that’s it. I find customers saying there’s no resource to go back and find out what happened.’ Taking these factors into account, it’s no surprise that decision makers became confused about the perceived and real benefits that can be obtained from using analytical applications.
One way out of the confusion is to ensure that analytic capability is on the strategic IT investment agenda. There’s a demand for it in a way that many see as leading to analytics pervading the enterprise. Cooper believes the development of this capability requires a long-term commitment that derives from the articulation of strategy.
But it’s here where many buying decisions get stuck. Thoma notes that past industry analyst comment suggests that business intelligence is not regarded as strategic. ‘Traditionally, these tools have been acquired by the vocal minority. That has to change because information is being demanded at all levels within the enterprise.’ This remark has a ring of truth about it, but adds to the complexity of working out a justifiable business case.
Rather than being limited to a set of key performance indicator’s on a board member’s desktop, or the means to get budget planning done on time, analytics should reach any staff member that needs to understand performance as it relates to their area of responsibility.
Board level decision takers still want to see fast payback on the original investment but the business case needs to include at least a smattering of the longer-term potential benefits that demonstrate value as opposed to reduced costs.
This is because the software investment in this pervasive scenario is only a fraction of the project cost. IT will inevitably play a critical role in the decision taking process because enterprise wide applications have significant implications for security and the network infrastructure.
Training, implementation, consulting and assessment will all feed into the cost equation. This should not mean that IT is left to justify the buying decision financially.
But if the task of assessment is tackled programmatically, as is recommended by Cranfield Management School, then one starts to see a much clearer way forward because one can start to think about incremental gains.
Finance should play a central role in developing and articulating analytic strategy that is rooted in financial accountability that is based on well understood ROI measures. The question is just how much finance is prepared to risk its reputation as a deliverer of value as opposed to being mired in its ‘traditional’ role of cost cutter.
WHERE TO FIND A POSITIVE ROI
E-business integration and e-learning projects deliver the best return on investment, with e-commerce and B2B marketplaces, customer relationship management and content management lagging behind, according to research, writes John Geralds in Silicon Valley. The findings are based on thousands of ROI studies by Nucleus Research. Companies that implement e-learning systems for a modest five or six-figure investment typically save money in reduced travel costs, human resources overheads and regulatory compliance.
However, companies that have invested in marketplaces to attract new partners have found limited returns and would have been better off investing in specific integration strategies with key partners, the report said. Companies that invest in large CRM projects are unlikely to achieve a positive ROI.
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