IT Success!: Towards a New Model for Information Technology

7.9. The limits of financial ROI when applied to IT

In the days before the 'dot bomb' crash and subsequent recession of 2001–2003, companies were awash in cash and IT projects were approved with highly subjective business cases. After the funds dried up, companies suddenly 'discovered' the requirement for objective business cases as an integral part of the approvals process. While this has clearly been a good thing from the perspective of rational investment planning, decision-making and accountability (in other words, governance), it unfortunately tended to institutionalize the notion that the only good business case is one that can be defined in traditional financial terms (e.g. ROA – return on assets; NPV – net present value; IRR – internal rate of return; payback period or break-even point). The reasoning behind this is that IT funding should be subjected to the same financial considerations as for any other part of the organization, namely that it should have an acceptable rate of return on the capital invested, usually based on a company's 'hurdle rate' or investment approval threshold. However, in the real world, things are not that simple.

Firstly, it should hopefully be clear by now that software investments are not the same as physical investments like plant, property and equipment, which can be analyzed in isolation for ROI. Similarly, the various stocks, bonds and other financial instruments which form part of a financial portfolio usually have little relation to each ...