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By Dennis Berman
JANUARY 25, 2000

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It's reality-check time here at frontier. We devote a lot of attention to information technology, trying to give our readers practical advice on the latest systems and office gear. But in our enthusiasm for technology that gets the job done, we sometimes lose sight of an important factor: Namely, where's the bang for the buck? Once you've forked over tens of thousands of dollars, retrained staff, and suffered through the inevitable system crashes, how do you know if your investment paid off?

It may seem like a silly question; no less a wise man than Federal Reserve Board Chairman Alan Greenspan has linked much of the economy-wide productivity gains of recent years to computer technology. Even so, the pundits have probably not run a small company where every penny matters and where technology upkeep can prove deceptively costly. A recent survey from Compaq Computer Corp., for instance, found that only 4% of corporate technology decision-makers knew that ongoing maintenance consumes the biggest chunk of information-technology budgets. "Right now, we buy what we think in our best judgment we need. We make subjective calls," says Eric Carden, IT manager at Time Domain Corp., a 100-employee semiconductor company in Huntsville, Ala.

To cut the guesswork, an accurate return-on-investment (ROI) number can be an important, if overlooked, tool for controlling technology costs and making smarter tech-buying decisions in the future. Especially as technology gets smothered in hype, "it's good hygiene to constantly ask yourself: What's my return?" says Mark Silvestri, president of technology consultancy Lifecycle Solutions in Avon, Mass.

What exactly is ROI? Think of it as a simple fraction, with the dollar-for-dollar benefits of technology (in cost savings or new profits) on the top, and the amount you spent to get those benefits on the bottom. Suppose you ponied up $10,000 to speed up your local area network, and after 18 months, you estimate that you saved $20,000 by cutting down on photocopies and employee downtime. That produces a 100% return--not a bad payoff. What's more, once you have that number in hand, you can do plenty with it: Use it as a yardstick to monitor the impact of future network upgrades, take it to a bank to justify a new loan--or, if you're disappointed, use it as leverage against the person or company that sold you the new gear in the first place.

There's only one rub. Measuring ROI can be a crude, frustrating process. To start, you need a baseline, gauging what your technology is doing for you now and what it costs to maintain. After you install the new technology--whether it's a network, servers, or an industry-specific piece of equipment--you'll have to take another set of measurements to show how productivity has changed. It can be time-consuming, especially when you're stuck quantifying such "soft" attributes as how an improved work environment helps retain valued employees. "You have to nurture and harvest the numbers," warns Howard Rubin, a research fellow at Meta Group in Stamford, Conn.

Many companies begin their ROI quest with a concept called "total cost of ownership," which seeks to measure all the expenses, both human and technical, behind a given technology (table). "Business owners don't understand what they're getting and why it costs so much," says Jeffrey Owen, an analyst at Gartner Group Inc. While you may think, for instance, that the cost of a simple desktop computer is fixed to the price of the machine and some occasional maintenance, there are a host of other expenses many company owners don't take into consideration. Gartner, for instance, estimates that 14% of the yearly cost of a PC gets sucked into the "futz factor"--employees wasting time on games and personal e-mail. And don't forget the costly downtime of a crash-prone server or a printer that's perpetually jammed. It all adds up: Gartner estimates the true annual cost of a PC at $9,000 to $12,000.

Once you've established baseline costs, you'll have to translate them into a productivity level. For manufacturers, this is fairly simple: They produce so many widgets per week, or make so much profit per item. For service companies, the calculation gets murkier. How does a design firm measure its productivity? Not just in the number of designs it completes, but also in customer satisfaction, speed to market, and employees' quality of life.

To gauge these effects, some big companies (small companies are noticeably absent from the ROI literature) take both employee and customer surveys in hopes of quantifying output. They also use old-fashioned stopwatches to monitor the time it takes to complete a given task--say, process a purchase order or download an intranet file. One less costly alternative is to survey your employees, asking them to describe briefly what they do with their time and what they produce. The answers won't be entirely accurate, but you'll get some sense of technology's effect on productivity.

After the new technology is installed, you'll want to take the same measurements again, generally at six-month intervals. As employees get familiar with their new tools, you should see an increase in productivity.

To get the most out of the ROI numbers, you may want to try an incremental tech-spending approach: paying piecemeal for small, self-contained units that are part of a bigger project. Monitoring the ROI on each piece gives you more control over budgets that threaten to spin out of control. "You can make each part a major checkpoint and ask whether it was worth it," says Jerry N. Luftman, executive director of information-management programs at Stevens Institute of Technology in Hoboken, N.J. "That way, if you want to pull out, you can."

These ROI calculations need not be limited to computer technology, of course. You may find, for instance, that a truck to speed distribution is a more productive investment than expanding your data-processing equipment. "You never know how emerging technologies are really going to be used, or even their full benefits," says Luftman.

Understanding ROI is also good insurance against the cost of technology consultants, who are profiting from businesses' fear of being left behind in the Digital Age. "Technologists, in or outside of your company, are not going to worry about costs," says Lenny Liebmann, a technology author. "So you'd better."

Even if you don't want to do the dirty work, asking for an ROI number may be one of the best, and cheapest, smoke detectors that money can buy.

This article was originally published in the January 31, 2000 print edition of Business Week's Frontier. To subscribe, please see our subscription policy.

Know Your ROI

You're contemplating spending $105,000 over the next three years on a local-area network upgrade for 30 employees. How do you know you'll get your money's worth? One way is to calculate a return-on-investment ratio. Figures reflect expenses and benefits over a three-year period.

$ 24,000 HARDWARE ACQUISITION New network routers, servers, wiring
14,000 SOFTWARE ACQUISITION Software licenses, antivirus protection
8,000 INSTALLATION Four-day project, including removal of old network
3,000 TRAINING Week of on-site training, computer tutorials
35,000 SUPPORT Three-year maintenance contract, cost of downtime and data loss
21,000 MAINTENANCE Cost of network transition, hardware/software updates, disaster recovery costs
20,000 FUTZ FACTOR Time wasted surfing Internet over new network connections
TOTAL: $125,000 
$ 60,000 LABOR Savings from cutting secretarial help by 1/3 total hours
15,000 MATERIALS Reduced costs of paper and photocopies
108,000 EFFICIENCY Eliminating time wasted by inefficient document sharing (5 hrs. per mo. per employee @ $20/hr. average wage)
72,000 INCREASED OUTPUT Net profits based on using saved time for additional projects
TOTAL $255,000


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