Technology Overload 

Technology ROI - Beyond the Math

Understanding key business factors and how they translate to realized return 

Practice Leader and CIO, Jim Black, shares his thoughts on Technology ROI as a continuation of Vaco’s “Technology Overload” series, which has spoken to several technology topics, such as Digital Transformation, Software Automation, and Technical Debt. This series was created to provide value to executive leaders with responsibilities to lead and/or leverage technology to meet business goals.

The Prism

Working closely with the Vaco Cincinnati team, I lead the C-Suite IT Advisory practice in our region. We help small-to-midmarket companies with IT strategy, navigation, and tactical execution.

As a Fractional CIO for several organizations over the years, I’ve found the best way to think about IT investments is through a 3D prism. Consider looking at IT investments through the following lens.

1. “Block and Tackling”:  Think back-end IT engine, IT operations, ERP systems, and HR processes; those areas that drive the lion’s share of most technology investments.
2. “Progressive Investing”: Technology investments that capture market share, transform operations to reduce product or service delivery costs, or expands the company’s market footprint.
3. “Protective Investing”:   Leveraging IT investments to safeguard the company in its ability to perform its mission and to protect its assets.

There are several important aspects to consider when managing your IT environment and day-to-day operations. One of those is to think of IT as an investment your company is making in its business. The investment in people, hardware, software, services, and a host of other elements to run the company, is expected to return value.

IT seldom runs like a swiss watch. Computers break. Software doesn’t always work. People make mistakes. Further, outside threats pound on the door and the business itself is never static. Over time, the effectiveness, or the return, of the IT environment diminishes. Think of it as the Law of Diminishing Marginal Returns. This fading return is what the industry terms “Technical Debt”.  

From an investment perspective, knowing your cost is foundational. To measure return, you must know what you’re spending. Don’t worry so much about categorizing Opex or Capex. How it’s financed is the work of the accountants.   Establish an initial baseline metric, be it IT spend as a % of sales, or IT spend per employee or any measure that is most suitable for you and your company. Then do your future planning and measure with that baseline. You can always compare your cost metric to the industry published by Gartner, InfoTech, or some other IT research firm.   But don’t put too much stock in those industry benchmarks. Every organization and its makeup varies too widely. What is important is directional; making sure your metric is either rising, falling or remains constant by design rather than happenstance.   If your IT cost as a % of sales goes up, is it because you’re intentionally investing? Or is it because your costs are not well-controlled and you have leakage? If your IT cost as a % of sales begins to drop, is it due to intentional cost reductions or is the company outpacing IT’s ability to effectively serve it?

2. Progressive Investing

Businesses prosper through growth and the creation of value. Whether through geographic market expansion, product development, process optimization, or some other means. In the last decade, technology has become a top contributing factor in driving company growth and value.

Examples of progressive investing might include:

• Development of software to capture market share
• Cloud transformation to scale the business and improve flexibility
• Digital transformation to lift value by driving down cost or unveiling valuable business analytics

All of these will have an economic return that is fairly simple to calculate. But the factors of success are not just about economics. ROI numbers, no matter how compelling, won’t speak for themselves. We must be able to tell the story of how they translate to the company’s visions and goals. Sure, the new ERP system will provide a 250% ROI by reducing working capital, cutting people, and boosting productivity. But what the CEO really wants to hear is that it will make the company a more irresistible supplier to key accounts or that it will grow business capacity, positioning the company to serve a larger market. If you’re private equity-backed, how will the technology investment quickly increase company value? Taking this higher-level view and approach is one of the quickest and most effective ways to gain executive understanding, buy-in, and funding. It also helps to draw support from reluctant business managers and users during project implementation and operation.

When weighing ROI, ignore the technical details. The underlying technology is critically important and there’s a place for explaining those details. But it’s superfluous information in the ROI equation. It adds confusion and unnecessary complexity. Also, keep in mind CIOs cannot evaluate return alone. It takes collaboration with business leaders to understand ROI. IT brings the methods and the costs. The business brings value and justification. Together, the return on investment is determined.

3. Protective Investing

When you buy a new home, you don’t go without protecting it from threats, such as a fire or a tornado or a 2-year-old. You take steps to mitigate the risks or prevent an investment loss.   You take measures to protect what’s in the home … whether it’s property or your loved ones. You buy insurance, install smoke detectors, your family gets regular health checkups, and a host of other protective measures. There’s real value in these investments. Very little difference exists between your personal and your business technology investments. Investments in protection are a necessary part of IT planning.

There is an industry-accepted formula for calculating return on Protective Investments.   For the record, it’s the potential monetary loss minus the cost of risk mitigation investment divided by the cost of that investment. But that’s the math. What is most important is the actual protection of your business, its people, its assets, and the community.

Risks or threats come in many forms, both internal and external. A sampling of internal risks might be:

• An application failure disrupting operations and the supply chain flow
• Hardware or network failure causing the loss of critical operational data
• Bad actors inside the organization seeking to rob the company or cause damage

Externally, businesses have never been more vulnerable to online risks and cyber-attacks than they are today. We’ve all heard the horror stories, or experienced them ourselves, and have seen the numbers concerning the consequences of cyber-attacks.   The consequences are not exaggerated and they’re not discriminatory.

Protective investments need to be made to prevent and deter risks. As we make these investments, some key factors come into play when calculating and communicating the return. As mentioned, there’s the economic ROI, based on potential monetary loss. But other factors are equally, if not more, impactful.   Consequences such as brand reputational damage, revenue loss, or loss of intellectual property. These after-effects are often uncalculatable. But the investments we make to safeguard against these come with real value and real return.

Summary

As IT leaders, we often gravitate toward the technology itself. That’s what we know, what we’ve been bred to do.   However, I encourage you to rise above the technical and step inside the prism of realized technology return. IT investments are always about the business and the impact on its people and community. There is always a return. And it’s incumbent upon us as leaders to understand the make-up of that return and ensure it remains positive.