Any woman or gay man worth their Prada will effortlessly be able to justify even the most outrageously expensive purchase as entirely necessary.

That new designer jacket is ‘an investment piece’; that cashmere jumper has actually saved them money because it was 70 per cent off in the sales – a saving that can then be put towards another indispensable item… like a new bag.

If only it were that easy in the boardroom. Getting the go-ahead from the board for a major IT project requires much crunching and grinding of numbers. But maybe the differences are not so great. Yes, it is relatively straightforward to work out the return on investment (ROI) of buying a new server or PC – weighing up the cost of buying a new machine against the reduced maintenance costs and speedier access. But with a CRM or ERP-sized initiative, then the figures are harder to calculate accurately. Is it really possible to come up with the ROI of such mammoth-sized projects? And how can you put a figure on something like customer satisfaction?

Guesswork

“It’s not like hitting a snooker ball with a cue and knowing how you hit the ball will affect whether it goes in the hole or not – there isn’t that causal effect,” says Bob Marsh, head of IT strategies and architecture at Friends Provident. “If we want to improve the customer experience, it’s not down to one project, it’s down to lots of things.”

For one thing, a giant project like CRM does not just affect one department; it touches all parts of the business. With such a wide scope, it is easy for benefits and costs to be derailed both by a series of small problems or by the sheer size and complexity of the installation.

Maybe that is why, according to the May e-skills UK quarterly ICT inquiry, most companies simply guess the ROI of their IT spending. Only 11 per cent of companies (rising to 30 per cent in large companies) actually measure it, the remaining 89 per cent rely – astonishingly – on their intuition to work out how projects will affect the business.

Friends Provident is definitely in that 11 per cent. “Friends Provident at the moment has got some very critical business goals and objectives that are exciting and define where the company wants to be in 2008 – 2009. Every single project has to support those goals and demonstrate how it achieves them. The real ROI is helping achieve those goals,” says Marsh.

Charting progress

To help reach those goals, the company has set up a business change team (BCT) which assesses the merits of each project and how it fits with corporate goals and objectives. The project director then becomes responsible for delivering those benefits.

"Based on what I see, it doesn’t surprise me that calculating ROI for a major system is so hard that it’s put in the too difficult box and people go with their intuition"

Chris Digby, partner, Deloitte & Touche LLP

“The problem at the start of the project is you don’t know all the costs,” says Marsh. “The BCT team at each milestone – known as gateways – of the project re-examine the benefits case. So if the marketplace or events change, then they will look at them again,” says Marsh.

Treating ROI as a living, breathing animal is vital, according to Chris Digby, partner in consulting at Deloitte & Touche LLP. “It’s surprisingly common where the business case is developed to get the ‘cap ex’ approved from the board and then forgotten about,” he says.

Stated purpose

It is only when the internal auditors come knocking a few years later that they find the document is completely out of date and the people who developed the original business case are long gone. No one owned the business case and the ROI, so no one checked if targets were met.

It is amazing in this game how hard people find it to answer the simple question: what are the business benefits of your new system or project? All too often, they will be unable to quantify exactly what has changed, relying merely on woolly statements about productivity rises and user satisfaction.

Going through the ROI process needs to be more than simply a method of securing backing for a project.“It’s best practise to have a referral document right through the life of a project and a programme manager must see what is happening in the company and how it could impact the business case,” says Digby.

That can affect buying decisions all the way down the line. He adds: “Based on what I see, it doesn’t surprise me that calculating ROI for a major system is so hard that it’s put in the too difficult box and people go with their intuition. If you look back over the last wave of spending – CRM was very difficult to justify. Many companies went down that route because other companies did and there were some horror stories.”

Business led

So they may have been wooed by the cross-selling abilities of CRM without ever establishing whether their customers actually wanted to be sold those services. ROI has to be entwined with business goals – it needs to create value, improve market share or meet compliance requirements.

The board should set the business agenda and then the IT department work out how their actions match that agenda, as Marsh at Friends Provident described. But in some companies, particularly smaller firms, the tail is still wagging the dog. It could be that IT reports to a financial director, who does not understand enough about technology to ask the right questions about what they are spending the money on.

Equally, after seeing their peers proudly flashing their Blackberrys on the golf course, a CEO may think the whole workforce should have one and railroad the IT department into providing them.

The right relationship

Both scenarios boil down to problems in the relationship between IT and the business. The best decisions for the business are made together; not by an overbearing CEO ignoring IT’s protests or IT arrogantly ploughing their own furrow. IT and business need to be aligned.

“This is the area where we fail the most,” says Martin Wright, president of the Corporate IT Forum (tif). “We’re starting to realise its importance and people are beginning to make great strides. IT saying ‘no’ is a big thing.”

True business value lies in understanding and balancing IT capabilities, business requirements and the relationship between business and IT.

“There are some people doing elements of this really well but you need to be doing the whole lot well,” says Wright. “You can have excellent IT capabilities but not good business requirements or have good value form services but the whole business relationship might be wrong. Getting value from IT is a balancing act – a whole host of things can go wrong.”

Creating value

You may be fantastic at negotiating deals with suppliers for technology but that is not much use to the success of the business if that technology does not fit with the company’s strategy. ROI is not synonymous with value but the two are inexorably linked. “I think business value includes ROI. You need to keep an eye on costs as well as an eye on the future,” says Adam Middlemass, IT director at conveyance and remortgage firm Enact.

"When there’s no obvious ROI that’s where the skills of the manager comes in and they have to really adept to quantify things that aren’t all about money"

Adam Middlemass, IT director, Enact

Trouble is, as Wright points out: “As soon as you have a value debate it becomes a cost debate.” That is particularly the case if that conversation is with your finance director. He is going to be interested in the tangible cost benefits, not something intangible like value.”

Digby adds: “Savings are easy to quantify but business growth or improvements in customer retention are more indirect. If you put in something to improve efficiency or business processes, then you can come up with nice quantified benefits.”

IT’s legacy

Given the high-profile disasters in IT in its Wild West days, the money people understandably want some proper figures to back up any proposed project. “We’ve perhaps been too dictatorial in the past and that’s got a legacy,” admits Wright, particularly when the amount of budget asked for was not based on reality.

“For a long time the perception was that IT tended to under-cost projects because that would allow them to go forward. Business perceived it as the ‘Oliver’ effect – you get the project started, but oh deary me, it’s going to cost three times as much,” says Wright.

At the other extreme, cost cutting can become the be-all and end-all and companies can lose sight of potential business benefits.

No treading water

“Companies are either improving or declining – there’s no steady state and to move forward
you need to do it as efficiently as possible but there’s more focus on keeping cost to a minimum,” says Marsh. “A lot of companies I’ve talked to went too far with cost cutting and kind of disabled themselves.”

And those obvious ways of improving efficiency have already been tackled. Perhaps the opportunities for creating truly spectacular ROI are coming to an end. “Making savings means it’s easy to come up with quantified results. Problem these days is that a lot of the low-hanging fruit in terms of saving has already been picked,” says Digby. It is no longer just about ‘quantity’ – the more intangible ‘quality’ is important too. The best business cases are a combination of the two: bringing cost benefits and a better service. “ROI is great if you have a quantified case but in many cases you’re looking at quantitative and qualitative,” says Digby.

Intangible benefits

What that means is looking beyond the simple productivity benefits of a piece of software to thinking about how it will change the way people work. To do that you have to establish their current work practises, which takes time.

One of Digby’s financial customers wanted to take three divisions and merge them into one.

“There was a clear ROI based on savings because of reduced headcount, reducing three properties to one and moving operations from a high cost geography to a lower cost geography,” explains Digby.

“So there was a clear financial case but in addition this company had very big ambitions. It had lots of contracts not supported on the old systems and by rationalising the business process and financial operations, they were able to create a platform for growth.”

Middlemass at Enact understands that you need to distinguish between measurable and ‘soft’ benefits. “We have a formal business case process that will properly quantify the costs and benefits of projects. Some of these things are tangible and some intangible,” he says.

Potential gains

While it is easy to establish the ROI of setting up a web service to deal with how post is handled in the company, including savings on staffing and stamps, it is not always so clear-cut.

“When there’s no obvious ROI that’s where the skills of the manager come in and they have to be really adept at quantifying things that aren’t all about money. “It’s a false economy if you only concern yourself about whether your company is going to make the bottom line this year. Intangibles are all about the potential for bringing in bigger benefits,” says Middlemass.

In the same way that spending £10,000 on a new company logo will not directly boost profits but could increase the value of the company, many IT projects do not save or generate funds.

Time will tell

A project can have a neutral or negative ROI. A recent project with Affiniti to implement a new voice and data system sliced £100,000 a year off its costs. An ROI no-brainer.

But the true value of the project lies not only with the cost savings but in less tangible benefits such as giving customers an online service and improved management processes. “Value is a function of time. There are two sorts of value – what you perceive at the start and value at the end are always quite different,” says Wright.

So while you may genuinely believe – or hoodwink yourself – that buying that little Prada number is worth the money, it is only later that you will know whether you truly got your money’s worth.