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Return on Infrastructure Employed
Rather than simply managing IT project by project, one company is taking the broader approach of comparing overall technology expenses with revenue. Here's why.
When Arinc Inc. makes decisions about technology projects going forward, it begins by looking backward.
The Annapolis, Maryland-based company, which provides systems engineering solutions to the airline industry, has taken to examining its ROIE (return on infrastructure employed). ROIE is a retrospective comparison of annual revenue (for Arinc, about $700 million in 2004) with yearly IT operating expenses -- the networks, systems, and applications that underpin the business.
"ROIE helps me examine IT expenses in the context of our overall management infrastructure to see if they lived up to their promise," explains chief financial officer Richard Jones. If IT delivers on that promise -- the case at Arinc, according to the ROIE metric -- then Jones is more likely to bankroll future technology projects that have a strong business case. "This is a much more effective metric than simply ascribing an ROI to each IT project and then justifying the individual rate of return," he asserts. "In my experience, when you try to justify ROI you end up rationalizing a whole bunch of spending without being able to point to a specific result. We have found that an aggregate metric like ROIE is a far more useful indicator of overall IT effectiveness."
Is ROIE this year's TCO (total cost of ownership), EVA (economic value added), CBA (cost-benefit analysis), NPV (net present value) or what-have-you? Without question, this new twist on an old theme underscores the frustrations of finance executives who must gauge tangible returns from costly technology investments. "If IT costs are going up and are not scaling with our business growth, something's out of whack," says Jones. "I wanted some way to continually question our processes and our infrastructure architecture."
Lies, Damn Lies, and ROITechnology research firms, consultancies, and vendors have built a cottage industry on helping companies quantify the hard dollar savings and softer productivity benefits of IT projects -- and each advisor has its own unique series of measures to justify IT expenses. Gartner, for example, will append a long list of "risk-adjusted" metrics to its ROI calculation; Forrester Research will assess the...