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The myth of RoI for IT investments

What is the most important 2 words that you will hear when you listen to a salesman trying to sell an IT solution to a prospective customer?

  1. RoI – Return on Investment
  2. TCO – Total cost of ownership

These are two holy cows that are omni-present in any investment.

In my opinion, the time has now come to slaughter these holy cows, at least from an IT investment perspective.

How many times have we seen that an organization is slow in adopting new technologies which have the potential to create substantial gains in the market place due to the consideration that their last IT investments have not paid off yet.

Also, how many times have we seen that organizations are stuck with an IT investment even when they know that it is not working out for them as the original objectives for the IT investment did not paid off.

Some smart people introduced the concept of RoI and TCO to provide a cushion of support to get organizations to invest in IT. This was true to a large extent in a world where IT as a capital expense, was primarily used to support operations and the pace of technological invention was slow to say the least.

In a world where technological advances do not take decades to pan out but are available in years and even months, these concepts do not hold good and have lost relevance. Not just have they lost relevance, but they could even have negative consequences for the organizations as they loose out on these technological changes and opportinities that these changes provide for an organization to re-invent themselves.

It is getting increasingly important for organizations to re-invent themselves or their markets to stay relevant, whether they like it or not.

In any case, the way RoI and TCO are calculated in most organizations are only subjective and internal savings and no one in the organization can say for sure that the returns were purely due to the investments and not due to a combination of a lot of such investments. The amount of time and effort it takes for an organization to do an TCO or a RoI analysis is significant. Not to mention that this reduces the focus of the organization from its key objectives (which is to find ways and means of serving their customers better).

In my opinion the most important consideration that an organization should have before deciding on any IT investment is to find answers to the following questions:

  1. Is the investment a necessary condition for the organization to stabilize & grow? 
  2. Will this investment make the organization more nimble & fast 
  3. Will this investment provide us a competitive edge in the market?

If answer to any of these three questions is yes, then the organization needs to go ahead with the investment and if the answer is no to all three, then they should just move on.

The worst thing that can happen is that the organization takes upto 7-8 months to evaluate the RoI for an IT investment and by the time the analysis is ready the technological landscape has changed again (Yes, with the current pace of change this is  more and more a distinct possibility).

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  1. Maarten de Vries
    August 9, 2013 at 4:37 am

    Agree! I was on a webinar with Ray Wang (CEO of Constellation Research) and he mentioned their “Maslow’s hierarchy of BUSINESS needs” with 5 levels:

    1. regulatory compliance (your “necessary condition…”)
    2. operational efficiency (your “more nimble & fast”)
    3. revenue growth (same)
    4. strategic differentiation (your “competitive edge”)
    5. brand (I would probably leave this one out)

    At the end of the day, detailed ROI/TCO calculations are usually written to reinforce a decision that management has effectively made already, so let’s just skip it (or only do it at a high level, perhaps) and then get on with it!

    • August 10, 2013 at 6:53 pm

      Completely agree with you.. Thanks for sharing your thoughts..

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