return on it investment

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RETURN ON IT INVESTMENT

Farrokh Alemi, Ph.D.

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Importance of Return on Investments

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Importance of Return on Investments

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Importance of Return on Investments

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PROBLEMS ARE SO WIDESPREAD THAT IT COULD NOT BE DUE TO MISMANAGEMENT

The problem is with our methods

Morgan Stanley:“US firms lost

$130 billionin unwanted IT systems”

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List of Costs & Savings

Underestimates affected business processes

Assumes IT increases revenue Assumes unused buildings have no

costs Training & maintenance costs

ignored Impact on productivity and quality

ignored

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Proposed Analysis

IT Cost

Total Other

Total Buildin

g

Total Person

nel

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Often positive and significant3. Examine causation

Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Often positive and significant3. Examine causation

Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

Central IT budget

IT budget in business units

+

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Often positive and significant3. Examine causation

Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

Number of times software used

Size of the database

Percent employees using the system

Etc

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Often positive and significant3. Examine causation

Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Clear relation in scatter diagram Large pair wise correlation

3. Examine causation Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Clear relation in scatter diagram Large pair wise correlation

3. Examine causation Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Clear relation in scatter diagram Large pair wise correlation

3. Examine causation Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Clear relation in scatter diagram Large pair wise correlation

3. Examine causation Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

Revenue

IT UseInvestme

nt

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Often positive and significant3. Examine causation

Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Often positive and significant3. Examine causation

Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

Revenue

IT investment

IT use

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Often positive and significant3. Examine causation

Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

IT investment

IT use

Revenue

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Often positive and significant3. Examine causation

Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Often positive and significant3. Examine causation

Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

Start

Middle

End

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Often positive and significant3. Examine causation

Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

•Correlation of investment & use times correlation of use & revenue is approximately correlation of revenue and investment

IT led growth

•Correlation of revenue & investment times correlation of investment and use is approximately correlation of revenue and use

IT followed growth

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Often positive and significant3. Examine causation

Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

•Correlation of investment & use times correlation of use & revenue is approximately correlation of revenue and investment

IT led growth

•Correlation of revenue & investment times correlation of investment and use is approximately correlation of revenue and use

IT followed growth

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Often positive and significant3. Examine causation

Revenue leads to IT use and investment IT investment and use leads to more revenue

Calculate ROI

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Steps in Proposed Analysis1. Gather data over at least 3 periods

Money spent on IT Use of IT by the business unit Organization’s or business unit’s revenues

2. Examine association between IT cost, use and revenue

Often positive and significant3. Examine causation

Revenue leads to IT use and investment IT investment and use leads to more revenue

4. Calculate ROI

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Investment In DoIT

5,000,000

5,200,000

5,400,000

5,600,000

5,800,000

6,000,000

6,200,000

Year 1999-2000 Year 2000-2001 Year 2001-2002

Budg

et

Numerous units were merged into DoIT in this time period. DoIT organization defined based on 2002 operation and budget reconstructed.

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IT Investment & University Revenue

$170,000,000

$175,000,000

$180,000,000

$185,000,000

$190,000,000

$195,000,000

5,000,000 5,500,000 6,000,000 6,500,000

DoIT Investment

Uni

vers

ity E

& G

Rev

enue

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Example: Evaluation of DoITThe Division of Instructional & Technology Support Services includes: Audio Visual Services Academic Computing

Labs, Electronic Classrooms, GMU-TV, Instructional Resource

Center, Johnson Center

Technology Student Technology

Assistance Resource Center.

A key service provided by DoIT is the WebCT course delivery system

Time Frame

Web-CTCourses

WebSeats

1999-2000 120 6,128

2000-2001 229 7,895

2001-2002 434 9,627

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Possible Sequence of EventsCause Catalyst End result Condition to be met

IT Investment Use of WebCT University Revenue

ρIR- ρIU ρUR =0

IT Investment University Revenue

Use of WebCT Not logical to expect revenues

to affect useUniversity Revenue

IT Investment Use of WebCT ρRU- ρRI ρIU =0

University Revenue

Use of WebCT IT Investment Not logical to expect use to

precede purchaseUse of WebCT IT Investment University

RevenueNot logical to expect use to

precede purchaseUse of WebCT University

RevenueIT Investment Not logical to

expect use to precede purchase

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Possible Sequence of EventsCause Catalyst End result Condition to be met

IT Investment Use of Web-CT University Revenue

ρIR- ρIU ρUR =0

IT Investment University Revenue

Use of Web-CT Not logical to expect revenues

to affect useUniversity Revenue

IT Investment Use of WebCT ρRU- ρRI ρIU =0

University Revenue

Use of Web-CT IT Investment Not logical to expect use to

precede purchaseUse of Web-CT IT Investment University

RevenueNot logical to expect use to

precede purchaseUse of Web-CT University

RevenueIT Investment Not logical to

expect use to precede purchase

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Possible Sequence of EventsCause Catalyst End result Condition to be met

IT Investment Use of WebCT University Revenue

ρIR- ρIU ρUR =0

University Revenue

IT Investment Use of Web-CT ρRU- ρRI ρIU =0

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Correlations

  IT investmentWeb-CT

SeatsUniversity Revenue

IT Investment 1

Web-CT Seats 0.943 1

University revenue 0.999 0.942 1

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Possible Sequence of Events

Cause CatalystEnd

resultCondition to

be metCalculated

valueIT

InvestmentUse of Web-

CTUniversity Revenue

ρIR- ρIU ρUR =0

=.99-.94*.94= .11

University Revenue

IT Investment

Use of Web-CT

ρRU- ρRI ρIU =0

=.94-.94*.99 =.00

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Conclusion of Analysis

1$ General Revenue

4 cents IT budget

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TAKE HOME LESSONObjective Analysis of ROI