Return on Investment (ROI) is one of the most popular performance measurement and evaluation metrics used in business analysis. ROI analysis (when applied correctly) is a powerful tool for evaluating existing information systems and making informed decisions on software acquisitions and other projects. However, ROI is a metric designed for a certain purpose – to evaluate profitability or financial efficiency. It cannot reliably substitute for many other financial metrics in providing an overall economic picture of the information solution. The attempts at using ROI as the sole or principal metric for decision making regarding in-formation systems cannot be productive. It may be appropriate in a very limited number of cases/projects. ROI is a financial measure and does not provide information about efficiency or effectiveness of the information systems.
Using ROI within IT Projects
ROI (return on investment) is a widely used measure to compare the effectiveness of IT systems investments. It is commonly used to justify IT projects, but can measure project returns at any stage and be used to evaluate project team performance and other relevant factors. ROI % = (Return – Investment Cost)/Investment Cost x 100
Comparing the ROI of different projects/proposals provides an indication as to which IT projects to undertake. ROI proves to corporate executives, shareholders, and other stakeholders that a particular project investment is beneficial for the business.
A project is more likely to proceed if its ROI is higher – the higher the better. For example, a 200% ROI over 4 years indicates a return of double the project investment over a 4 year period. Financially, it makes sense to choose projects with the highest ROI first, then those with lower ROI’s. While there are exceptions, if a project has a negative ROI, it is questionable if it should be authorized to proceed.
ROI may not be useful in every IT project. Below is a list of examples where calculating the ROI may not be appropriate:
- Expenditure such as IT consumables, replacing broken PC’s
- Short duration maintenance projects that can be completed in less than 1 month.
- Projects that do not produce cost savings or revenue. For these ROI will be zero or negative.
- Projects that are mandated for regulatory and compliance.
- Projects that involve life or death. (e.g., Healthcare Solutions),
- Projects which only have intangible benefits and no measurable financial benefits