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Chapter One: ROI and the Need for Smart IT Investment Decisions

"It [ROI] will let us begin to make assessments and decisions about funding a project or developing a new service based upon some true data. That moves you from having emotional debates about projects to having factual discussions."
Gerry Wethington, Missouri CIO1

Government decision makers must make the most of scarce resources and at the same time respond to ever-increasing demands for improved performance and new technology. Thus the need for wise investment in information technology continues to grow. Growing demand in the face of scarce resources generates hard questions and close scrutiny of proposals for new investments. What’s more, the dismal failure record of many government IT investments raises legitimate concerns about the value of these investments and why they so often fail to live up to expectations, or even to work at all. As a result, IT planning processes often include, or even require, a rigorous business case to justify new IT investments. These include ways of assessing the costs and returns to be expected from that investment, that is, return on investment (ROI) analysis. This Guide is designed to help government executives who need to design, direct, conduct, or work with the results of such an analysis to make the most of their investments in information technology.

Growing interest in assessing returns on IT investments has spawned wide interest in methods of return on investment analysis. However, there is little agreement about best practices or specific methods for assessing ROI. Professional publications and consultant white papers present quite a variety of possible approaches. As a result, government executives and decision makers have difficulty choosing or designing a return on investment analysis that is both feasible and appropriate to their needs. To help administrators and decision makers with these choices this guide presents an overview of the purposes and concepts of ROI along with an introduction to basic methods and example cases. It also includes links to other resources for those who wish to explore some subjects in greater depth.

This guide treats ROI analysis as part of the overall decision making process for IT investment. The planners and designers of an IT project can use ROI analysis to help persuade decision makers to support the project. Decision makers can use an ROI analysis, indeed may even require one, as part of an IT investment proposal to aid them in evaluating it. In either case, an ROI analysis will be shaped by the situation in which it is designed and carried out.

Decisions about what sort of return on investment analysis to do, or whether to do one at all, will usually depend on a variety of factors. ROI analysis may or may not fit the larger context of investment decision making. Decision situations driven by very short deadlines or highly specific policy directives may rule out extensive analysis. Scale matters as well. An elaborate ROI analysis would hardly be justified for a small-scale, low-risk project that requires a fast decision. By contrast, large complex projects are typically high- risk propositions for which the added time and cost of an extensive ROI analysis would be fully justified. Even though justified, in some environments ROI analysis is not used at all in favor of best practice reviews or benchmarking to evaluate investment possibilities. Current practices vary considerably. In Iowa, for example, the state government has a standard framework for all agencies submitting IT project proposals, including business case and ROI analysis requirements.2 The US Office of Management and Budget has imposed similar requirements on federal agencies. Agencies and local governments in other states may develop their own internal business case and ROI requirements.

Given the diversity of practice in the IT investment world, this guide takes an eclectic, non-prescriptive approach. It treats the subject of ROI analysis from the point of view of a curious but uncertain decision maker. The key issues facing this decision maker are whether to do an ROI analysis and, if so, how. The guide does not advocate engaging in ROI analysis under all circumstances, nor does it favor any particular technique. Instead it presents an approach to understanding a range of purposes and methods for ROI analysis that can assist that decision maker to move forward with wise and effective IT investment choices.

1 "Running the Numbers," Government Technology, June 2002, p.23.
2 The Iowa ROI approach can be found at http://www2.info.state.ia.us/roi/index.html. The Federal business case requirements are found in OMB Circular No. A-11.