Digital Tweed/Commentary: ROI Is Dead!

• By Kenneth C. Green
• 08/19/05

In the quest for return on IT investments, the non-financial return may be less measurable—but no less valuable.

Whether you sat or slept through Introductory Economics, there is a very good chance you nonetheless understand the concept of productivity. What’s more, even if you never had a finance class, you can probably offer an operational definition for the concept of return on investment (ROI).

But just to be sure that we share a common language about these concepts—productivity and ROI—let me offer some quick definitions and examples: My daughter’s econ textbook defines productivity as, “the amount of product [or service] produced by each unit of capital or labor.” Yet, most of us work with a more operational definition, particularly when we talk about productivity and technology.

We experience productivity when:

• The price of a product or service declines and the quality of the product or service remains constant
• The quality of a product or service improves while the price remains constant
• The price of a product or service declines even as the quality improves. (This, of course, is the best-case scenario!)

As with productivity, there are strong historical and cultural links between technology and ROI. Here as well, many of us also work with a personal or operational definition. For example, if you are among the tens of thousands of individuals who refinanced a mortgage in recent years, you probably conducted an ROI analysis: You may have measured the costs of refinancing (mortgage fees, title search, etc.) against the reduced costs of your mortgage. In the end, how quickly did you recoup your costs (six months? 10 months?) and then go on to find yourself with a few extra dollars in your pocket or bank account each month because you were paying less interest on your mortgage?

Return: Hard Dollars or Non-Financial ‘Benefit’?

No doubt you are wondering what all of this means for those of us in the education community. Clearly, “academic productivity” is the underlying issue in the mantra of college presidents when they proclaim that their institutions (read: their faculty) “will do more with less, and do it better.” Moreover, there is little question that the institutional investments in technology during the past two decades have been a catalyst for campus and public policy conversations about “academic productivity,” often focused on faculty workload and student outcomes.

Critics of the technology spending levels (and even some fellow travelers) complain about “all the money spent on technology in schools and colleges over the past 20 years,” noting that “there is little evidence that faculty are ‘more productive’ or even that student test scores have improved dramatically.” Not surprisingly, the large sums that colleges and universities spend to acquire, install, and maintain administrative/ERP (enterprise resource planning) software and systems to support student information, human resource and finance systems, or campus portals, etc., are subject to ROI analysis.

But here’s the problem: While ROI analysis works well in many contexts (new technology for manufacturing, the payback on your reduced-rate mortgage), it is not necessarily the appropriate model for an assessment of campus investments in IT, particularly many (but not all) investments in administrative technologies/ERP systems.

Consider the following (common) scenarios:

• College A wants to install a campus portal—aggregating, integrating, and enhancing many separate campus functions and services into a unified Web presence.
• University B plans to offer online credit card payments so that students can pay for tuition, textbooks, and t-shirts through the campus Web site, and so that alumni can make online donations.
• Community College C intends to install a new student information system (SIS).
• Campus D has decided to replace a 20-year-old, homegrown financial system with financial software from a commercial provider.

Each initiative described above involves a significant investment of institutional resources: money, personnel, and time. Each initiative will require the institution to purchase and maintain an IT product or service. Campus officials at each institution strongly agree that each initiative is important; indeed, critical and strategic. But even as campus conversations at these institutions and elsewhere focus on the costs of these investments, the discussion has not focused on the financial return. Rather, the discussion is about the benefit of these investments: how the new portal service, online credit card transactions, new student information system, or a new financial system will benefit—enhance and improve—institutional services and operations.

Why focus on the benefits of investment, as opposed to focusing on the more traditional (some might say conventional) financial ROI? A key issue in each instance is that it is difficult (indeed, perhaps impossible) to monetize (place a financial value) on the “returns.” But just because you cannot monetize the benefits d'es not mean that the benefits don’t exist.

Let’s look specifically at a student portal that provides online registration. There is no question, at least for campus officials and students, that this is a good thing. But how to calculate the “return” on the investment? Yes, the campus can look at the human and financial resources needed to install and maintain the new portal system, and gauge that against current registration practices and costs. But what about the student experience at registration? How d'es the campus assess the value of the portal and online registration for students? How should colleges monetize the time that students will have to spend driving to campus and waiting in line to register for their classes? And should the institution then differentiate the value of student time—a high value for the adults enrolled in executive MBA classes, versus a lower value for freshmen? More likely, the campus will assess the portal from a benefits perspective: administrators will point to enhanced and improved services for students (no long lines; no special trips to campus or walks across campus for registration, etc.).

Transcending Education: The ‘Benefit of Investment’ Model

The “benefit of investment” model has applications beyond campus conversations about portals. For example, Bank of America (www.bankofamerica.com) has been running TV commercials touting new ATMs that reduce transaction times by six seconds; not much if you are the only person waiting to get cash, but potentially significant if you’re a soccer mom (or dad) with a minivan full of kids and there are six people in line ahead of you. Similarly, in his new book, The World Is Flat (Farrar, Straus, and Giroux, 2005), New York Times columnist Thomas Friedman reports that some McDonalds fast-food restaurants in Missouri have “outsourced” orders from the drive-thru lane to a call center in Colorado: “Order takers in Colorado Springs converse with customers in Missouri, take an electronic snapshot of them, display the order on a screen to make sure it is right, then forward the order and the photo to the restaurant kitchen… People picking up their burgers never know that their order traverses two states and bounces back before they can start driving up to the pick-up window.” Why do it? What is the ROI for McDonalds? Reduced costs for the franchise (one call center operator can handle multiple orders) and much better service for the customer: The Missouri-drive-thru-to-Colorado-callcenter arrangement reduces order time in dual-lane drivethrus by 30 seconds, to about 65 seconds on average, compared to the average of 2.5 minutes for all McDonalds (single- and dual-lane drive-thrus). No question that’s a big benefit if you are sitting in a minivan in the drive-thru line.

My cell phone and my notebook computer cost me money—both for the initial investment and in ongoing costs. I can articulate the benefits of my investments in these technologies. But I cannot, at least in clear language comprehensible to civilians (as opposed to economists), calculate the ROI for my cell phone and notebook computer. Similarly, whether I am in line at the ATM or the drivethru, or online at Acme.edu, better (faster!) service makes a big difference to me, and probably to you, as well. And the ROI for investing in the technologies that provide enhanced (better/smarter/faster) services—at an ATM, in the drive-thru line, or via a campus portal—cannot always be calculated in financial terms. So let’s declare ROI dead, or at least inappropriate, for much of the campus conversation about IT. Instead, let’s focus the assessment, debates, and discussions on the benefits of campus investments in IT, on what the technologies allow us to do (or do better!), and on the academic and administrative resources and services technology provides to students and faculty.