Keane Insight - India Trends

Intangibles matter in RoI

RoI is a vital measure for every enterprise user of IT. Measuring and managing a company’s intangible assets can lead to a clearer view of corporate value, says Gaurav Patra

Return on Investment (RoI) is hardly a new concept. In these trying times for businesses, it’s on everyone’s minds. RoI today not just about money—in fact, someone who calculates RoI only in terms of money is actually restricting his vision with regard to expansion.

According to K P Unnikrishnan, the RoI model should take into account revenue and variable cost drivers as well as general overhead expenses

In the last decade, while a lot of money has been invested in IT, organisations did not see RoI in the direct sense. This is probably one of the reasons for the tech slowdown in the last two to three years, as CEOs have questioned IT managers on past investments before making any further investments in IT. Today, there are heightened pressures to increase RoI, specially when it comes to high-value resources utilised in technical computing. This means improving resource management and harnessing idle cycles, expanding application access and resource sharing, and elimination of redundant data and redundant work.

IT & RoI

IT is increasingly playing an important role in calculating RoI and technology providers can now help in calculating RoI and determining financial benefits that can be realised. Online RoI calculators that help current and potential customers estimate potential financial benefits of investments are also available. Without undertaking a full financial analysis, one can get good indicators of RoI by looking at breadth, repeatability, and current cost of transactions. The greater the scale of benefits, the greater the RoI potential. It is also obvious that strong IT infrastructure can help an organisation achieve better RoI.

However, the return on infrastructure investment in a short period is difficult to measure. “A project to enhance your infrastructure will not deliver short-term RoI. It’s only down the road, when you want to increase productivity or pursue new market opportunities that the value of that infrastructure will become apparent,” says Swarup Choudhury, VP and country manager–Systems Group, IBM India.

It is also very important that the technology deployed should support business goals. This means evaluating IT functionality in terms of the business benefits it delivers. IT helps manage assets better, which enables companies to keep better track of their investments and monitor initiatives executed. This is especially true when it comes to monitoring large scale IT initiatives like ERP to derive maximum benefit from them.

P K Gupta says that improved performance of intangibles is also critical to RoI

Although over a period of time IT’s role in RoI has substantially increased it is not always possible to calculate RoI every time you make an investment in IT. “There are many tangible and intangible factors involved in IT investments and calculating RoI on each of them is not possible. In many cases, it is a perceived RoI. It is also very difficult to justify RoI all the time,” says P K Gupta, director, Strategic Development, Intercontinental Operations, Legato Systems India.

Companies have also started paying close attention to items that are not listed explicitly on the balance sheet, but nonetheless affect the bottom line. Intangible assets like people, ideas, relationships, systems and work processes are what we know as the invisible advantage to the enterprise. Now, both analysts and investors are increasingly assessing the invisible advantage as they try to size up corporate strengths and weaknesses. Because of IT managers being closely involved with all these assets, they may be best equipped to comment on them and assist in calculating RoI.

Calculating intangibles is critical

Measuring and managing a company’s intangible assets can lead to a clearer view of the corporate’s value. The intangibles are the facets of business that most companies overlook and take for granted. Though typically intangibles don’t get measured, managed or disclosed, yet they matter a lot when it comes to the RoI calculations. Considering intangibles in calculating return on investment is a relatively new phenomenon. “Intangible assets add to the corporate value of an organisation, in addition to revenue and profits. IT helps in managing these assets, keeping track of the same and reusing them,” says Choudhury. Gupta says that technology plays a big role as most of the intangible assets are available in terms of knowledge capital in the

New Economy.

RoI goals must include quantifiable calculations covering both sides of the equation: financial benefits (revenue and cost reduction) as well as capital and expense infrastructure costs. Non quantifiable benefits like increasing customer loyalty, targeting a new sector or penetrating a distribution channel, though harder to calculate, can be equally important in calculating RoI. “An RoI model should take into account revenue and variable cost drivers as well as general overhead expenses,” says K P Unnikrishnan, country head-Marketing, Sun Microsystems India.

Apart from this, it is also very important for the companies to consider general overhead expenses like data integration and management costs, campaign management systems and ongoing support and the cost of new servers and supporting network bandwidth. In fact, a company’s own experience as well as the third-party research into historical data must justify every thing on the RoI model. If the data is not available, relevant industry metrics from credible market research houses can fill in the gaps. The best RoI cases forecast several scenarios that are realistic and achievable. Initiatives like Knowledge Management help in managing this prized asset. SEI-CMM and PCMM are some of the certifications that organisations look for in the software industry to differentiate from the rest. Off late, analysts and investors are actually scrutinising these non-financial measures. Companies like Infosys are even putting these measures into their annual balance sheet.

An increasing number of CIOs believe that improved performance on intangibles like ‘customer satisfaction/value’ play a vital role in measuring the success of an IT investment. This is an important development, since companies are clearly focused on improving customer service. The interesting part is that CIOs are trying to map the success of an IT initiative directly to the customer satisfaction/value gained. Here the customers are both internal (employees, suppliers, distributors) and external customers. “Businesses are trying to create a harmonious environment wherein employees, suppliers, distributors, and the end-customer can benefit by usage of IT,” says Choudhury.

The other important intangibles are reduced cost, completion of project on time, and increase in revenue and profits. Cost reduction, one of the main reasons why companies invest in IT, comes second only to customer service. Companies, given their customer-centric approach, are focused on retaining existing customers and acquiring new ones. The logic: a satisfied customer will automatically translate into increased revenues and profits. “It can be perceived that improved performance of intangibles is also critical to RoI,” says Gupta. Sun’s Unnikrishnan agrees with Gupta and suggests that ultimately the best reason for investing in a technology is not the RoI. It is enhancing your customer’s experience so that they will continue to do business with you and that is the best RoI one can get.

Selecting metrics for intangibles

Metrics are gaining importance because IT can enable new business models. As consumers push for personalised online services, data aggregation technology is introducing new business opportunities. Metrics differ from industry to industry and service to service. There are various types of metrics for IT investments, that are vendor-supplied, internally generated or investment portfolio-based. Generally, companies are using internally generated methods as they are tailored to one’s specific business. It isn’t easy going for key intangibles, but these can be applied with some variations.

However beyond traditional metrics, decision-makers should consider the following points while evaluating intangibles:

• Increased business intelligence—Information available sooner enables management to pre-empt situations with timely decisions.
• Enhanced planning—Access to relevant information, in a central database, will lead to better planning.
• Better decision-making—Makes for more informed decisions.
• Information sharing—Corporate knowledge is dispersed and organisation is smarter.
• Collaborative organisations—Use of management systems link strategy to tactics to measurable results, the organisation gains the synergy of everyone working towards a common goal.

IT executives have a role to play

With IT becoming increasingly central to business strategy, IT executives have evolved to meet the challenge by working closely with top-level executives and business managers. The increased reliance on technology has stepped up the pressure to use IT to soften the blows of the current economic downturn. IT executives have a crucial role to play in the corporate leveraging of intangibles. IT executives can be involved in identifying, measuring, and reporting on intangibles. “Measurement of RoI is a complex issue and the IT executives need to play a role here in setting the parameters for IT investments since they understand the technology and understand its implications,” says Unnikrishnan.

In today’s knowledge economy, IT is the differentiator—providing a competitive advantage and winning edge to companies. Keeping this in mind, IT executives must not only evaluate, purchase, and install IT systems, but they must also create the invisible advantages of IT differentiation and innovation. IT executives should take more than the apparent costs into consideration while reviewing RoI. Considering only the initial purchase, management skills and the transition cost is not enough, one needs to take into consideration both visible as well as invisible differentiation costs into account while evaluating RoI. IT does bring in visible differentiation—collaboration, productivity of teams, faster and efficient way of delivering information for decision support and business actions, reduction in training and travel expenses due to distance learning, e-learning, etc.

How to calculate RoI

RoI is a measurement used to evaluate initiatives in terms of financial value to an organisation and should be used to help justify those same initiatives. But it is important to note that the concept of RoI and the measurement of RoI vary from company to company and from person to person. This is because there are different criteria by which to measure RoI and there are many ways to quantify it. In its simplest form, though, RoI is the ratio of present value of expected benefits over the present value of expected costs. However, Internal Rate of Return (IRR), Net Present Value (NPV), and Economic Value Added (EVA) are the most common methods used for determining RoI. Of these, IRR is the most prevalent. These models need the organisation to look at aspects like expenditure, cost of acquisition, income, and discount the cost of capital. Calculating the RoI for an ERP implementation may involve juggling multiple variables; one has to consider the cost savings in terms of reduced inventory, faster production processes, or better inter-departmental communication. On the other hand, RoI on an enterprise-wide VoIP application would be as simple as calculating the cost savings by making voice calls over the existing data network instead of the telecom network. A number of CIOs do not employ any financial technique to determine RoI. These CIOs rely entirely on the intangible benefits gained from an IT implementation, instead of calculating it in pure money terms. Cost isn’t the only goal of RoI. Companies focused on cost savings alone will be left behind. More important than costs, that can be avoided, are the benefits achieved, such as improved operations, increased customer satisfaction and enhanced competitive positioning. RoI is about the increased revenues and margins from ongoing use of the system. The problem is that cost savings are often easy to calculate, while ‘opportunity costs’—the ability to develop new products or reach new customers—can be very difficult to measure. A majority of CEOs cite increased productivity as the most important factor in determining whether IT is delivering value. But it isn’t necessarily true that increased productivity results in increased revenues. Time saved is not always time that employees use to work in. Moreover, RoI isn’t the only factor in determining whether a particular technology is worth investing in. One should also consider the risk and the payback period. In industries where the market is changing quickly one needs a fast payback because possibly a year from now that company and its competitors may be involved in different activities.