Return on investment (ROI) for business case scenarios

4 Feb

” Which business case scenario represents the best business decision? Which action scenario should the analyst recommend? What is the return on investment from taking a proposed action? ROI and other cash flow metrics (Net cash flow, NPV, IRR, and Payback period) are often used to address such questions.”

Most financial business case analysis usually will look into the future, forecasting cash inflows and cash outflows predicted under each of two or more action scenarios.

http://www.business-case-analysis.com/return-on-investment.html

Studies prove that investments in information technology are sometimes not reaching the benefits that were predicted from the beginning. Research proposes that the potential cash inflows in the business case were very often never possible to begin with. The potential cash inflows may have been overstated or there may have been a lack of knowledge of the business changes required to obtain the benefits. It was found that discontent in projects is more to do with expectations formed at the beginning, than to affairs that occur during the project. More often than not overstated benefit figures in business cases can be linked with low success rates. The overstated benefits could have a negative impact on the management’s commitment to IT investment.

The main idea in creating a business case for an IT project is to get funding approval for the financial investment. Most organizations put most of their focus on the financial returns from their IT investments, with the intention of expressing as many of the benefits as they can in financial terms. However, focus on these benefits can raise issues, including:

  • Promoting false calculations of financial benefits due to insufficient evidence
  • Restricting the financial benefits to only those needed to offset the expected cost of the technology.
  • Creating unlikely expectations to demand enough financial benefits to allow for the necessary return in relation to costs.
  • Discouraging innovative uses of IT because these financial benefits may be unknown.
  • Concentrating solely on efficiency gains from IT, improving individual processes but sometimes at the expense of overall organizational effectiveness.
  • Reducing the technology costs by curtailing functionality.
  • Identifying the organizational costs of implementation.

Sources;

Ward, J., Daniel, E. and Peppard, J. 2008. Building Better Business Cases for IT Investments. MIS Quarterly Executive 7.

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