return on it investment
DESCRIPTION
Farrokh Alemi, Ph.D. Return on IT investment. Importance of Return on Investments. Importance of Return on Investments. Importance of Return on Investments. Morgan Stanley: “US firms lost $130 billion in unwanted IT systems”. The problem is with our methods. - PowerPoint PPT PresentationTRANSCRIPT
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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