How To Be Sure Tech Dollars Pay Off

Companies continue to foster corporate cultures imbued with innovation, and investments focused on using technology to improve business processes help make this possible. Business–sector productivity increased steadily this year, the U.S. Bureau of Labor Statistics reports, up 8.6% for the third quarter of 2003, compared with a 2.7% increase for the first quarter.

Boosting network bandwidth, upgrading PCs, and deploying collaborative software are among the most common investments made in the past 12 months by some of the best–known U.S. companies. The typical company on this year's InformationWeek 500 spent approximately $60 million on new products and technologies and in excess of $70 million on new applications to improve business operations.

These companies aren't just relying on word of mouth to make certain IT investments improve business functions. Understanding the benefits derived from technology purchases is a standard business practice for InformationWeek 500 sites. Ninety–five percent of companies ranked on the 2003 list use a metric to analyze payback from business–technology investments.

The most frequent method, return on investment, calculates the profitability of an investment by determining the amount of net revenue or operating–cost savings that exceeds the cost of the investment. Nine in 10 InformationWeek 500 sites rely on this. Another popular measurement is payback analysis, with 70% of InformationWeek 500 sites reporting its use. Slightly more than half of companies also run net–present–value reviews, which identify the current value of future cash flow and subtract that amount from investment costs to gauge financial performance. Two in five sites look at internal rate of returns, while a fourth conduct economic value–add calculations that establish operating profits by subtracting capital and debt needed to generate and identify a profit.

What role will performance metrics play in establishing the value of your company's business–technology operations next year? Let us know.

Helen D'Antoni
Senior Editor, Research
[email protected]

ROI Techniques

Which metrics are used to measure the returns on technology investments?

Stock price might indicate the value of a company in the eyes of investors. Yet few executives consider stock price when measuring the performance of business-technology investments. Only 5% of InformationWeek 500 sites look for jumps in stock prices to confirm that technology purchases are working to the company's advantage.

Increased Reliance Does your company use return–on–investment or payback–analysis metrics?

Use of two ROI metrics has increased incrementally in the past year. Nine in 10 of InformationWeek 500 sites report conducting analysis of IT purchases by determining the return on investment: net revenue from the purchase or operations costs that exceed the initial purchase price. Seven in 10 conduct payback analysis. In both instances, use is up compared with a year ago, when 84% of InformationWeek 500 companies used the former and 64% the latter.

Employee Effect

Is worker productivity examined to gauge returns on technology investments?

A majority of this year's InformationWeek 500 companies don't tie IT investments to employee output. Less than half-46%-take worker productivity into consideration when conducting IT investment reviews. The examination of worker output to measure the value of technology purchased is most prevalent among companies in health care, construction and engineering, and electronics. Its use is less pervasive in the travel and hospitality, media and entertainment, and consumer–goods sectors.

Subtle Indications

Is analysis of intangibles part of your company's technology–performance metrics?

Not every IT benefit is easy to measure. Some are less tangible, yet warrant consideration if the contribution of a tool or service is to be fully understood. Outfitting a sales rep with the latest in handheld devices might increase productivity, but consider the favorable impression it also makes on customers and potential clients. And in increasing numbers, intangible returns are being evaluated by the nation's largest companies when judging the business value of technology investments.