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Historically, technology was acquired to automate or improve productivity for a specific, definable business challenge – to speed and automate transaction processing; to reduce human intervention (read: human error); to perform complex calculations and data manipulations beyond the scope of human capability.

While these definable business challenges continue to exist, and new challenges emerge (one prime example being Monte-Carlo simulations used in complex financial modeling), ICT is no longer deployed simply for the benefit of specific or easily definable business operations.

Virtualization changed all of that. Before contemporary virtualization approaches, there were mainframes and distributed computing. In the mainframe world, the business challenges that they were deployed to solve were clear, concise, specific and easily definable – typically in data processing. In distributed computing environments, each server, or each desktop or laptop client had a specific purpose – for each server, there was generally one application. For each desktop or laptop, it aided in the productivity of the individual user.

However, virtualization and multi-user collaborative and productivity software, along with evolving infrastructure-, platform-, and software-as-a-service models have made a direct correlation between investment and return. For example, networked storage has an effect on multiple applications; virtualized servers can run multiple applications that can support operations across multiple departments and functions; networks are almost by definition, shared. With all this sharing, cross-functional, and cross-departmental any given investment in technology, no matter how small or large has a effect on return across multiple aspects of an organization.

The Prospective Perspective

It is not unreasonable to apply classical ROI calculations and measurement for specific applications. Many of these applications are instantiated as appliances.

But for the most part, organizations should take a holistic, comprehensive and collective approach to measuring the benefits of technology investments. Organizations should use return on technology investment (or ROTI) as the more accurate and appropriate measurement. This metric should be measured across two time periods, and can be represented in the following equation:

KPI can be any metric that the organization uses to measure performance. For the most part, this would be a growth rate of revenue or profit measured against the percentage change in technology investment (represented by the negated change in technology spending against the KPI).

An example would be the following:

Year 1

Year 2

Δ

KPI (revenue $M)

$100

$115

15%

Technology Spend ($M)

$2.1

$2.3

9.5%

T (tech spending as % of revenue)

2.1%

2.0%

-4.8%

As it is quite obvious, the absolute spending of technology goes up by 9.5%. However, for most companies, this would be seen to be a negative thing. However, when technology investment is measured as a percentage of revenue (the KPI used in this example), the change in technology investment (DT) actually goes down by 4.8%.

In this example, ROTIcoeff is 104.2. ROTI is measured not as a percentage, but as a coefficient. Any positive coefficient is desirable, and the higher the coefficient, the more advantageous to the organization.

Why not measure ROTI as a percentage?

One of the arguments that can be raised is why not use the absolutes of the net change in technology spending and divided by the net change in KPI? In this example, the result would be a ROTI of 1.3%. This return is rather disappointing, and could be cause for concern for most companies; especially when augmented by the absolute increase in technology spending.

The reality is that a negative change in the technology spending measured against an admirable growth rate in revenues is rather impressive.

Growth in companies must come with a necessary increase in the technology services associated. Technology should be considered in the same way that the absolute spend on raw materials will increase as production increases; the absolute spend in selling costs will increase with improved sales; and human resources expenses will also increase as companies grow. With each additional new hire, there is an associated cost for a laptop or desktop, there will be management costs associated with applications (eg. Microsoft Exchange, Salesforce.com), and over the course of time and scale, this will effect an increase in technology infrastructure investment.