Dream jobs emailed to you
Home page

How Do You Spell Value?
Metrics: Technologists used to look for innovation. Now they want return on investment
By Scott Kirsner
June 10 issue — Rocketing out of the station at 72 miles an hour and then rising straight up toward a 215-foot summit, riders on the Wicked Twister roller coaster at Ohio’s Cedar Point amusement park probably aren’t thinking about whether this new piece of technology will produce a return on investment. But Dick Kinzel, president of the company that owns Cedar Point and five other parks, certainly is. The coaster cost him $9 million, and he used projections of bigger summer crowds to rationalize the expenditure. “We expect it to deliver an increase in attendance this summer and justify a $2 increase in our admission price,” says Kinzel, 61, who was among the first to ride the Wicked Twister. “We generally count on a one- to two-year payback on a ride like this.”

Advertising on MSNBC

  ONLY THREE YEARS AGO, using return on investment, or ROI, as a guide to technology purchases seemed so... Old Economy. Technology strategists at many firms used other criteria, such as a product’s distinctiveness, its degree of innovation, even the “eyeballs” it might attract to a Web site. Then the bubble burst. And now companies like Kinzel’s publicly traded Cedar Fair LP are rediscovering the value of ROI in everything from new rides to data-center software. “The glamour days of just investing and hoping that a payoff would come are long gone,” says Robert Alston, vice president of information-technology services at Dollar Rent A Car Systems in Tulsa, Okla. “In the late ’90s,” says Randy Benz, chief information officer at battery maker Energizer Holdings in St. Louis, “we lived in a feeding-frenzy environment. Everyone was afraid not to have something that someone else had. What you’re seeing now is a backlash. People are taking a look at IT spending and saying, ‘This is like any other investment we make in the company, and it should generate a return’.”

•  Fighting Web Fraud
•  Technologists Look For Return on Investment
•  Online Publishing: Not Ready for Prime Time
•  Classifieds: Papers Fight Back
•  Book Review: The Struggle for Control of the Internet
•  Interview: The Global Impact of Mobile Phones
        Frugality is in. In fact, a majority of respondents in a survey of technology buyers at large companies conducted last month by Dell Computer said they regarded ROI as their most important criterion in spending decisions. Technology executives are putting off purchases of items that don’t produce tangible benefits in the near term, such as brand-new desktop computers running Microsoft’s Windows XP. They’re squeezing their existing data-storage systems to get the highest possible capacity out of them. Paul Gaffney, who joined office-supplies retailer Staples earlier this year as chief information officer, says that one of his major initiatives has been to wring more out of the company’s existing technology infrastructure. “Our idea is, ‘Let’s make better use of the Oracle [database software] licenses we already own, or put more data onto the servers we have today’,” says Gaffney. And when he does buy a new product, he makes sure it’s used widely throughout the company, rather than by a single business unit. “Two years ago, we might’ve justified a project [to help track incentives for the company’s sales force] just for one business unit,” Gaffney says. “Today our approach is, ‘We have incentive-compensation programs all over the company, so let’s do everything we can to maximize the return on this system by using it in three or four different units’.”
        Carol Beggs, the vice president of technology at Boston-based Sonesta International Hotels, also took an ROI-oriented approach when she began to deploy broadband Internet access throughout the chain. “You can figure out how many guests you think will use it and how much they’ll pay, and it’s relatively easy to make a strong case for doing it,” Beggs says. “It’s much harder this year to get non-ROI projects approved.” (There are two exceptions, Beggs says: projects related to network security and disaster recovery. “Since 9-11, people have taken a hard look at those issues,” she says. “They want to make sure they’re protected from any kind of cyberterrorism, and also that if they had to relocate suddenly, they’d be able to have a secondary location to run their operations from.”)

       The return of ROI has prompted technology vendors to shift their sales strategies in a troubled economy. “The operative word to describe vendors these days is ‘panicked’,” says Bill Bass, senior vice president of e-commerce at Lands’ End. “They know that not all of them will survive the downturn.” So they’re adapting to the ROI-obsessed market, recrafting their pitches to show they can deliver a measurable return on investment, in either lower costs or increased revenues. For example, ProfitLogic, a Cambridge, Mass., company that makes software to help retailers form decisions about which merchandise to mark down, avoids the kind of generic examples that other firms use to convince buyers that it can deliver a healthy return on investment. Instead, explains president Scott Friend, “we take last season’s data from our prospective customer and simulate how our system would have improved sales and profit margins if they’d been using it.”
        Some software vendors even offer pricing schemes pegged to the ROI their product generates over time. Trilogy, an Austin, Texas, maker of e-business software, prices its products according to the impact they have on their customers’ businesses. “If we don’t help an automobile manufacturer improve their [success] rate when they’re selling cars, they don’t pay,” says Trilogy founder Joe Liemandt. “If we and our customers are focused on delivering value for their business, then good things happen for both of us.”

       Buyers are skeptical that tech vendors have developed a sudden interest in aligning themselves with customers’ objectives, after years of devising ever-better ways to fleece customers. But Bass at Lands’ End believes that Trilogy’s model of standing behind the effectiveness of new hardware or software—rather than just bragging about its ability to deliver ROI—could gain momentum. “If someone comes in and makes promises about the returns they’re going to deliver,” he says, “then I want them to be held to those promises. One way to do that is to say, ‘You only get paid if the software performs at the level you said it would’.”
        There is a problem with the ROI renaissance: it may lead some companies to overlook new technologies that could give them a competitive advantage. Vendors and tech execs alike say that it’s often hard to measure the near-term return of being on the cutting edge. “Think about the Web browser, or the spreadsheet, or the PC,” says Greg Erman, chief executive of MarketSoft, a Lexington, Mass., software firm. “With the early adoption of any technology, the financial return is not well known. The ROI requirement will filter out most of the great innovations, and that’s a real problem.” Some buyers agree. “If you really want to ruin your business, you make the CFO the most powerful person below the president, and you don’t spend anything,” says Alston at Dollar Rent A Car. He says that a campaign to improve the company’s Web site “didn’t have as hard [an ROI] number as you’d like,” but it won backing because “the Web is a channel that represents the future of our business.”
        Similarly, at FedEx Corp. in Memphis, CIO Rob Carter says that “it’s important to have the courage and conviction to invest on a strategic basis.” Carter says his employees “do run very specific ROI numbers on some projects,” but that others get the go-ahead purely because they are likely to make customers’ jobs easier, and differentiate FedEx from competitors like United Parcel Service and Airborne Express. A new system that allows customers to track inbound packages was launched in May because “it was a key competitive weapon that would allow us to grow our business,” Carter says.
        Nonetheless, pragmatism and conservatism remain the prevailing attitudes among today’s technology buyers—even when the important projects are roller coasters, not retailing software. At Cedar Point amusement park, Kinzel says that he’s content using older information systems. His focus is on technology that ratchets up the excitement his rides provide, which encourages visitors to return often and spend more. “The back-office stuff doesn’t affect the guest experience, so we don’t feel the need to lead in technology there,” Kinzel says. “What we measure is how much the customer screams, and how much they smile. That’s our ROI.”
       © 2002 Newsweek, Inc.
    Link Group Image
MSNBC News Wild About Wi-Fi
MSNBC News Water, Water Everywhere
MSNBC News Fighting Web Fraud
MSNBC News How Do You Spell Value?
MSNBC News Not Ready for Prime Time
MSNBC News MSNBC Cover Page

Infocenter Write Us Newstools Help Search MSNBC News

Would you recommend this story to other viewers?
not at all   1    -   2  -   3  -   4  -   5  -   6  -   7   highly

  MSNBC is optimized for
Microsoft Internet Explorer
Windows Media Player
MSNBC Terms,
  Conditions and Privacy 2002
Cover | News | Business | Sports | Local News | Health | Technology & Science | Living & Travel
TV News | Opinions | Weather | Comics
Information Center | Help | News Tools | Jobs | Write Us | Terms & Conditions | Privacy