July 7th, 2006

INTERVIEW: Michael Gonnerman on ROI

Posted by Michael Krigsman @ 2:01 pm

Categories: Interview

Tags: Michael Krigsman

When CIO’s congregate, there is often talk about “aligning” IT with the business. ROI is one important method for measuring the benefit that IT returns back to a business organization. Unfortunately, the ROI concept is often misunderstood and wrongly applied. To help sort through ROI, I spoke with Mike Gonnerman, an expert in ROI and related matters. 

Mike, can you give us a concrete definition of ROI?

ROI means “return on investment”, which is a fancy way of saying if I spend $xx now, how much will I get back later, and when.

For example:

• If I buy a company today for $10 million, can I expect it to be worth $15 million in 3 years, or only $12 million?
• If I increase my sales effort (spend more on people and marketing campaigns), will my revenues (and, more importantly, profit) increase, say, 30% this year?
• Or, if I spend $10 on a young tomato plant, put it in the sunlight and water it every day, how many tomatoes will I get at the end of the growing season?

So, the concept involves an investment measured in $’s, a return (can be negative, which is a bad thing) and time (i.e., how long it takes you to realize the gain or loss).

In other words, ROI measures the dollar value of an IT investment. Don’t most businesses look at projects this way?

Yes, for the large, sophisticated companies.

No for all the rest. Most companies focus on the top line (revenues), and the expense details like costs and headcount by department. They do not look at expenses by project, and do not relate the project expenses to the top line (revenues).

For example, software development companies should be looking to generate revenues during the next 3 years equal to 25x the amount they spend on a software development project. But few software companies develop 3 year plans – most will develop a 1 year plan, by month, usually during Q1 (i.e., late).

You recommend developing a baseline ROI target before the project starts. Why is this important?

If you do not address ROI up front, you will not be able to measure performance against your target – hence, there will be no accountability.

I find it strange that companies will have complex sales compensation plans that reward sales folk based on whether they deliver on their plans – but, the same companies do not use this approach for the technical project side of the business. Compensation is not related to project success until projects are ready to fall off the rails – at which point management will introduce a project-completion bonus in an effort to keep the project alive.

How does this cart-before-the-horse situation arise?

Most managers are not trained, either formally or in their work careers, in project management. The accountants know finance, the sales folk know the sales process, and the technical folk know customer support and technical details – but, few folk have managed significant technical projects.

Does IT project success depend on ROI planning? 

Actually, the opposite is true – if there is no ROI planning, the project will not be a success. You need to do the up-front planning in order to define success, measure progress, and change course during the project.

Can you share a few key points to help readers of this blog?

1. Get a project manager who “has done it before”. On-the-job training is great, but not at your company. Especially, if the project is significant.

2. Be sure the right the infrastructure is in place. You must be able to capture and report on project costs regularly and on a timely basis.

3. Before kicking off the project, make sure the project is well defined: what will the end product be? How long will it take to complete? What assets will the project manager be able to use to complete the project on time? And, what is the risk of failure, and your “Plan B”?

Finally, have regular status reviews and reports. Continually assess the costs, timing, deliverables and top line impact.  And, if necessary, begin developing your “Plan B” sooner rather than later.

Mike Gonnerman has 37 years experience as a Director, Advisor, financial consultant, CFO and auditor, and has helped companies deal with issues involving corporate oversight, financial management, financial reporting, forecasting and financing. His financial tools have been adopted by hundreds of companies, and he speaks frequently on finance and entrepreneurship. His website is http://www.gonnerman.com/.