CIOs to IT Vendors  - "Get Real on ROI"

As budget battles continue, it is becoming apparent to most CIOs that the struggles over which projects are approved, and which will fall by the way side are not over.

CIOs know that one way out of the emotional turmoil on project approvals is to quantify the decision making using ROI analysis of each planned project. This process can help rationalize the decisions amongst the stakeholders, and will help to avoid the backstabbing, political infighting, and rogue IT investing when business units and users do not get what they want. The bottom-line is that a technology investment isn't going to make it through the approval process if it doesn't carry with it a reliable financial analysis showing the impact the investment will have on the corporate financials.

During these budget battles, the CIO faces a dilemma. The day to day management barely leaves enough time to institute new analysis methodologies and develop the CFO analytical and presentation skills needed to quell the budget unrest and make sure IT gets its fare share. At the same time, they can rarely turn to more than a couple of staff members for help, because the ranks of most IT organizations are technically, not business management oriented. Several recent studies indicate that nearly half of the CIOs lack confidence in their organizations ability to accurately calculate ROI on IT investments

As a result of this gap between ROI survival requirements and the capability and maturity to reliably perform the financial due diligence, over 80% of buyers turn to IT vendors to help them quantify the value proposition of their solutions. In fact, many CIOs now make it one of the top five most important selection criteria requirements - the ability of a vendor to proactively justify their solutions.

This does not mean that the CIOs are giving the keys of the henhouse to the fox. Some, such as Garrett Grainger from Dixon Ticonderoga turn to several vendors at once, asking each to generate a business case. He then uses the best of these ROI analyses to build his own justification business case - and more importantly, to select the business partner he trusts. Other CIOs indicate that they utilize the vendor ROI analysis as a starting point - then, if the analysis passes muster, take ownership of the analysis themselves for fine tuning and presentation. Regardless, it clearly is a hurdle for any vendor, and more, a partnership requirement that the proposed project deliver documented tangible results.

Although CIOs rely on vendors for help, they remain skeptical. Too often they see ROI business cases with magical 1000%+ returns, immediate payback periods, drastic overestimation of ideal benefits, and underestimation of real costs to implement and own. As a result of these slick marketing presentations, less than 5% of buyers say vendors do a good job of quantifying their value propositions, and fewer still find the vendor analysis credible.

Therein is the conundrum - CIOs need vendor ROI support, but they are skeptical of the results. How can vendors step up and meet the CIO requirements for credible ROI?

We provide the following guidelines for “real ROI” from success-minded IT vendors:

1. Set the stage - A vendor cannot walk in the door and immediately begin diving into a survey or an interactive analysis without laying the foundation for the analysis. The vendor needs to communicate to the CIO what model methodology will be used, how key metrics will be calculated, what costs and benefits will be considered in scope, what data will need to be collected to achieve an accurate assessment, and how much time the CIO will need to invest to achieve a credible analysis. In the beginning, it is important to minimize the analysis time and derive a quick ROI analysis - one that can be developed in a single ROI meeting - to get the team close and to validate that it is worth the time to proceed. Because the CIO's time is precious, this initial analysis will provide a starting point to see if the project warrants further investment in time and effort. The closer and more credible this initial analysis is, the more likely the CIO is to invest further time in prioritizing their team to research the business case further.
    

2. Get things started with good research - Vital in the first couple of meetings is the fact that the team might not know all of the current costs and opportunities for saving. Rarely without hours of digging and analysis, particularly in large organizations, will the CIO know all of the metrics needed to perform an ROI analysis. Therefore, the analysis needs to start with industry research, which is scaled to match the company size, location, industry, management practices and other key drivers. Using this third party information to intelligently derive personalized defaults will get the team close on their analysis, even though all of the actual metrics might not be known. As well, the CIO will know that the metrics are not vendor metrics, but have been collected and validated by a credible third party.
   

3. Justify and document the cost and benefit assumptions - not only are industry defaults important, but they must be thoroughly documented. For estimates of the company's “as is” costs, those prior to project implementation, the analysis should document how the defaults were personalized for the company, and what research formed the basis for the scaling. For benefits, the analysis must document the features, benefits, key performance indicators and source of the savings or business benefit assumptions. Even better, case studies of achievements of savings by similar vertical company's can help improve the credibility in savings assumptions.
   
   

4. Allow no stone to be unturned - The vendor who partners with the CIO in the ROI analysis process documents how key figures are calculated. A simple calculation without the need for a finance degree to understand how results were derived is essential. Further, the CIO and team must be able to change any default metric, research or assumption to be changed from the default so the business case can be completely personalized, and the savings and costs adjusted. This allows what-if analysis to occur so that the business case can be made conservative and realistic
   
   

5. Include strategic benefits - many projects are implemented not just for their current financial benefits, but because they will help the company perform better in the future, and are therefore strategic. In fact, Cx level executives rank strategic benefits, often called intangible benefits, as equal to or more important in decision making than the tangible benefits. Many view the tangible benefits as a necessary hurdle, and leave the final choice on project approval to whether the project bolsters the company's competitive and strategic advantage.
   
   

6. Scale the analysis using realized benefits and project risks - many business cases underestimate costs and over estimate benefits. One way to make the business case more realistic is to scale the results using risk. A project's risk can be assessed and the discount rate adjusted to provide more realistic key financial metrics. More advanced modeling using Monte Carlo simulation can be used to calculate the range of possible outcomes scaled by risk probabilities and impacts. Often more important is to scale down the benefit contribution of soft benefits, often called indirect benefits, of the project. These soft benefits are often second and third order effects of the solution and include benefits tied to customer satisfaction and availability improvements to name a few. These benefits can be scaled to 10-40% of their original value in order to assure that the business case is being built on a solid foundation of hard, direct benefits.
   
   

7. Pass the sniff test - every CIO has an ROI target in mind for a set of solutions. If the business case is unrealistically out of range, it will not pass the sniff test with the approval board and the entire team loses credibility. Results should be risk adjusted and scaled so that returns are realistic and reasonable.
   
   

8. Commit to the partnership with an ROI SLA - a CIO knows that the vendor who is committed to minimizing their risks and maximizing their reward is vital to their success. One of the best ways to be sure the ROI is realistic and that results can be achieved is to get the vendor to commit to an ROI service level agreement, where a target ROI and key performance indicators are established, against which the team can track progress. Should the vendor fall short of planned targets, compensation may be withheld, but should the vendor outperform, additional compensation would be delivered - a reward for a vendor partner who delivered on their value commitment.

 

For the vendor, the advantages are obvious. With a cost-justification report and business case, a project is 60% more likely to be approved, and according to IDC the sales cycle is reduced by 30-40% because the often lengthy financial analysis phase of the project can be greatly reduced. The ROI analysis can serve to meet CIO requirements, and deliver competitive advantage if indeed they deliver a more credible ROI story, and more so willing to step up with an ROI Service Level Agreement.

For the success minded CIO, a vendor partner who is committed to the realization of promised value can mean reduced risks, increased rewards, and an improved bottom line.

The bottom-line: Our research proves that the IT vendor who steps up to meet these CIO demands will experience increased sales (up to 30% increases), reduced sales cycles (30-40% reduction) and improved competitive advantage (60% more likely to get the project approved compared to the competition).