Farrokh Alemi, Ph.D.
RETURN ON IT
INVESTMENT
0
1
Cedars Sinai Loses
$34 Million
2
3
Morgan Stanley:
“US firms lost
$130 billion
in unwanted
IT”
The problem is with our methods
NOT
MISMANAGEMENT
4
List of Costs & Savings
 Underestimates affected business processes
 Assumes IT increases revenue
 Assumes unused is saved costs
 Training & maintenance costs ignored
 Impact on productivity and quality ignored
5
Total
Building
Total
Personnel
Total
Other
IT Cost
6
Steps in Proposed Analysis
Gather data over at least 3 periods
1.



Examine association between IT cost, use and
revenue
2.

Often positive and significant
Examine causation
3.


4.
Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
Revenue leads to IT use and investment
IT investment and use leads to more revenue
Calculate ROI
7
Steps in Proposed Analysis
Gather data over at least 3 periods
1.



Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
Examine association between IT cost, use and
revenue
2.
Central IT budget

3.


Often positive and significant
+
Examine causation
Revenue leads to IT use and investment
IT investment and use leads to more revenue
IT
budget
in
business
4. Calculate ROI
units
8
Steps in Proposed Analysis
Gather data over at least 3 periods
1.



Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
times software
used
2.Number
Examineofassociation
between IT
cost, use and
revenue

Often
positive
and significant
Size
of
the
database
Examine causation
3.


Revenue leads to IT use and investment
IT investment and use leads to more revenue
Percent employees using the system
4.
Calculate ROI
Etc
9
Steps in Proposed Analysis
Gather data over at least 3 periods
1.



Examine association between IT cost, use and
revenue
2.

Often positive and significant
Examine causation
3.


4.
Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
Revenue leads to IT use and investment
IT investment and use leads to more revenue
Calculate ROI
10
Steps in Proposed Analysis
Gather data over at least 3 periods
1.



Examine association between IT cost, use and
revenue
2.


Clear relation in scatter diagram
Large pair wise correlation
Examine causation
3.


4.
Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
Revenue leads to IT use and investment
IT investment and use leads to more revenue
Calculate ROI
11
Steps in Proposed Analysis
Gather data over at least 3 periods
1.



Examine association between IT cost, use and
revenue
2.


Clear relation in scatter diagram
Large pair wise correlation
Examine causation
3.


4.
Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
Revenue leads to IT use and investment
IT investment and use leads to more revenue
Calculate ROI
12
Steps in Proposed Analysis
Gather data over at least 3 periods
1.



Examine association between IT cost, use and
revenue
2.


Clear relation in scatter diagram
Large pair wise correlation
Examine causation
3.


4.
Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
Revenue leads to IT use and investment
IT investment and use leads to more revenue
Calculate ROI
13
Steps in Proposed Analysis
Gather data over at least 3 periods
1.





Clear relation in scatter diagram
Large pair wise correlation
Examine causation
3.


Revenue
Examine association between IT cost, use and
revenue
2.
4.
Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
Revenue leads to IT use and investment
IT investment and use leads to more revenue
Calculate ROI
14
Steps in Proposed Analysis
Gather data over at least 3 periods
1.



Examine association between IT cost, use and
revenue
2.

Often positive and significant
Examine causation
3.


4.
Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
Revenue leads to IT use and investment
IT investment and use leads to more revenue
Calculate ROI
15
Steps in Proposed Analysis
Gather data over at least 3 periods
1.



Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
Examine association between IT cost, use and
revenue
IT
2.

Often positive and significant
Examine causation
3.


4.
Revenue
investment
Revenue leads to IT use and investment
IT investment and use leads to more revenue
Calculate ROI
IT use
16
Steps in Proposed Analysis
Gather data over at least 3 periods
1.



Examine association between IT cost, use and
revenue
2.

Often positive and significant
IT use
Examine causation
3.


4.
Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
IT
investment
Revenue leads to IT use and investment
IT investment and use leads to more revenue
Calculate ROI
Revenue
17
Steps in Proposed Analysis
Gather data over at least
3 periods
Cause
& effect are
1.



Examine association between IT cost, use and
revenue
Clear mechanism
2.

Often positive and significant
Examine causation
3.


4.
correlated
Money spent on IT
Use of IT by the business unit
Cause
precedes
effect
Organization’s or business
unit’s
revenues
No effect, when all
causes are absent
Revenue leads to IT use and investment
IT investment and use leads to more revenue
Calculate ROI
18
Steps in Proposed Analysis
Gather data over at least 3 periods
1.



Examine association between IT cost, use and
revenue
2.

Often positive and significant
Middle
Examine causation
3.


4.
Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
Start
Revenue leads to IT use and investment
IT investment and use leads to more revenue
Calculate ROI
End
19
Steps in Proposed Analysis
1.



2.
3.
4.
Correlation
of investment & use
Gather data over• at
least
3
periods
times correlation of use &
IT led
growth
Money spent on IT revenue is approximately
correlation
Use of IT by the business
unit of revenue and
investment
Organization’s or business
unit’s revenues
Examine association between IT cost, use and
revenue
• Correlation of revenue &
IT

Often positive and significant
investment times correlation of
followed
Examine
causationinvestment and use is
approximately correlation of

Revenue
leads
to
IT
use andand
investment
revenue
use
growth

IT investment and use leads to more revenue
Calculate ROI
20
Steps in Proposed Analysis
Gather data over• at
least 3 of
periods
Correlation
investment & use
1.



2.
3.
4.
IT led
growth
Money spent on IT times correlation of use & revenue
is approximately correlation of
Use of IT by the business
unit
revenue and investment
Organization’s or business unit’s revenues
Examine association between IT cost, use and
revenue
• Correlation of revenue &
IT

Often positive and significant
investment times correlation of
followed
Examine
causationinvestment and use is
approximately correlation of

Revenue leads to ITrevenue
use andand
investment
use
growth

IT investment and use leads to more revenue
Calculate ROI
21
Steps in Proposed Analysis
Gather data over at least 3 periods
1.



Examine association between IT cost, use and
revenue
2.

Often positive and significant
Examine causation
3.



Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
Revenue leads to IT use and investment
IT investment and use leads to more revenue
Calculate ROI
22
Steps in Proposed Analysis
Gather data over at least 3 periods
1.



Examine association between IT cost, use and
revenue
2.

Often positive and significant
Examine causation
3.


4.
Money spent on IT
Use of IT by the business unit
Organization’s or business unit’s revenues
Revenue leads to IT use and investment
IT investment and use leads to more revenue
Calculate ROI
23
Investment In DoIT
6,200,000
6,000,000
Budget
5,800,000
5,600,000
5,400,000
5,200,000
5,000,000
Year 1999-2000
Year 2000-2001
Year 2001-2002
Numerous units were merged into DoIT in this time period. DoIT organization defined based on 2002 operation and budget reconstructed.
24
IT Investment & University
Revenue
University E & G Revenue
$195,000,000
$190,000,000
$185,000,000
$180,000,000
$175,000,000
$170,000,000
5,000,000
5,500,000
6,000,000
6,500,000
DoIT Investment
25
Example:
DoIT
Evaluation of
The Division of Instructional &
Technology Support Services
includes:







Audio Visual Services
Academic Computing Labs,
Electronic Classrooms,
GMU-TV,
Instructional Resource Center,
Johnson Center Technology
Student Technology
Assistance Resource Center.
A key service provided by
DoIT is the WebCT course
delivery system
Time
Frame
Web-CT
Courses
Web
Seats
19992000
120
6,128
20002001
229
7,895
20012002
434
9,627
26
Possible Sequence of Events
Cause
Catalyst
End result
Condition to be met
IT Investment
Use of WebCT
University Revenue
IT Investment
University Revenue
Use of WebCT
University Revenue
IT Investment
Use of WebCT
University Revenue
Use of WebCT
IT Investment
Not logical to expect
use to precede
purchase
Use of WebCT
IT Investment
University Revenue
Not logical to expect
use to precede
purchase
Use of WebCT
University Revenue
IT Investment
Not logical to expect
use to precede
purchase
ρIR- ρIU ρUR =0
Not logical to expect
revenues to affect use
ρRU- ρRI ρIU =0
27
Possible Sequence of Events
Cause
Catalyst
End result
Condition to be met
IT Investment
Use of Web-CT
University Revenue
IT Investment
University Revenue
Use of Web-CT
University Revenue
IT Investment
Use of WebCT
University Revenue
Use of Web-CT
IT Investment
Not logical to expect
use to precede
purchase
Use of Web-CT
IT Investment
University Revenue
Not logical to expect
use to precede
purchase
Use of Web-CT
University Revenue
IT Investment
Not logical to expect
use to precede
purchase
ρIR- ρIU ρUR =0
Not logical to expect
revenues to affect use
ρRU- ρRI ρIU =0
28
Possible Sequence of Events
Cause
Catalyst
End result
Condition to be met
IT Investment
Use of WebCT
University Revenue
ρIR- ρIU ρUR =0
University Revenue
IT Investment
Use of Web-CT
ρRU- ρRI ρIU =0
29
Correlations
IT investment
IT Investment
Web-CT
Seats
University
Revenue
1
Web-CT Seats
0.943
1
University revenue
0.999
0.942
30
1
Possible Sequence of Events
Cause
IT
Investment
Catalyst
Use of WebCT
University
Revenue
IT
Investment
End
result
University
Revenue
Condition to Calculated
be met
value
ρIR- ρIU ρUR
=.99=0
.94*.94= .11
Use of Web- ρRU- ρRI ρIU
CT
=0
=.94-.94*.99
=.00
31
Conclusion of Analysis
1$ General
Revenue
4 cents IT
budget
32
Take Home Lesson
OBJECTIVE
ROI
33