Return on investment… value… metrics… measurements… Performance factors…

One issue that I am frequently faced with is trying to quantify exactly what the value of an information technology (IT) investment really is.  What is the “proper” metric to use to evaluate, calculate, justify, and measure the value of spending money on computer and networking systems?

ROI Cartoon

ROI Cartoon

Once upon a time….way back in the last century, when computers cost lots of money and were unique items instead of just disposable consumables this was actually easier.  The options for doing a classic return on investment (ROI) calculation in the ancient case of replacing the farmers with the tractor is actually very easy to calculate, present, and explain.  Trying to justify the replacement of three-year-old corporate generic beige computer boxes with brand new generic black computer boxes is a lot more challenging.

A search of academia and the web for help does not offer much in the way of usable, proven techniques.  Here are some excellent resources that try to make the case for a method to calculate ROI for IT:

  1. Resource Management Systems: “What is IT ROI?”
  2. Information Week  “SmartAdvice: There’s More Than Cost Benefits To Consider When Analyzing IT ROI “
  3. CIO.com “If your IT metrics do not align closely with business goals, you’re less likely to achieve top performance.”

To do a basic ROI calculation, you need to know the investment, return, and time frame.  The time frame can been chosen and the investment is known.  The hard part comes in deciding what metric you are going to use to measure and predict the return. "Your performance metrics indicate how you’ll determine whether you’ve carried out the critical success factors you’ve identified and indicate the kind of data you’ll need to gather." (Harvard Business School Publishing)

So what are some possible metrics to use?

CPU Speed. This is an oldie, but goodie.  Many are familiar with Moore’s Law and had grown accustomed to expecting to get more speed for the same dollars every few years.  Unfortunately, we all ran up against silicon, metal, and heat physical limits a couple of years ago.  Today’s CPUs are actually running slower than the clocks’ of ones two years ago.  This is not to suggest that today’s multiple core, hyper threading CPUs are not faster at the same clock speed as yesterdays, just that CPU speed alone is a poor measure for an ROI calculation.

MIPs or Instructions per second. Again, the attraction here is simple to explain, but elusive.  There are just too many “moving parts” in your average information system.  Memory bandwidth, network throughput, cache sizes, etc.  Since you cannot reliably predict the specific bottleneck that is relevant for your chosen software applications, this is just too risky of a metric to justify big purchases on.

Power Consumption. Green IT is all the rage right now.  Many would like you to believe that it is your Earth Day duty to buy new computers due to their almost guaranteed lower power consumptions to machines only a year old.  Unfortunately, this case requires assumptions about the costs of electricity, HVAC, and space that are often out of the control of the strategic purchaser.  How much do you think a kilowatt will cost next year?

Cost. Well this is certainly the easiest to use.  It is fairly easy to show that newer is cheaper to buy and power than current is to support and protect.  It also goes a long way to explaining the “rush to the floor” that PC prices have seen in the past five years.  Something deep inside us though, reminds us that cheap is not the same as good.

There are certainly many others performance measures you could choose, but the point is that none adequately provide a much-needed measure that is explainable, quantifiable, and verifiable enough to base major acquisitions off.

If you need to calculate the value for a gallon of gas, a pound of food, or a box of pens, I have tools for you.  But, if you want me to tell you with absolute certainty the ROI for a theoretical IT purchase, I first need to figure out the IT’s value.

What is the value of a pound of IT to your organization? What metrics do you use?