You've inevitably heard it spoken. "What is the ROI?" It's the question raised by today's cautious business managers when evaluating new online initiatives.

Let's face it, calculating a return on investment for any technology related initiative is a scary task these days. The impact on the bottom line and financial forecasting are just too crucial to ignore in today's uncertain economic climate. To take it one step further, determining the ROI of a specific Web related project is often an exercise in evaluating intangibles. How can a financial model measure the impact on non-financial assets like brand image, ease of use and customer loyalty? Often, you don't have access to solid costs or measurement mechanisms. Better yet, how can you quantify what can't even be identified?

Fortunately, there are several alternative yet effective methods that address the justification and decision making processes ROI measurements have traditionally been known to serve.

It's all about value
Gartner, a leading technology research and business advisory firm , states the situation plainly on their Business Value of IT Website, "The cost of IT investments is obvious, but the business value is often elusive."

The question, "What is the ROI?" is really one about value. A more appropriate question to ask when evaluating your online initiatives would be, "What is the value and who or what will be the recipient of that value?"

For the purposes of this article, the term "value" as it relates to Web initiatives should be understood to mean:

The functional, economic, and psychological assessment of relative worth, usefulness or importance as determined by the actual user or customer.

It sounds heavier than it really is. To say it another way, end users and customers evaluate value based on their perceptions of what can be gained using criteria that are important to them. Users and customers can be internal or external, the recipients or the stakeholders. They are the people directly impacted and affected by the initiative. The evaluation criteria generally fall into three categories.

• Functional - The availability of tasks and tools.
• Economic - The costs or savings associated with the features.
• Psychological - The emotional response associated with the experience.

Most of our personal day-to-day decisions result from this methodology and inevitably we each perceive value differently. Therefore, anticipating the value of an offering to the targeted customer becomes a craft that is crucial to your project planning, strategy, and execution.

Where ROI can be limited
Traditional ROI evaluation can fall short in determining the overall value for Web projects because it is a rigid internal financial model. It looks for reductions in costs and concrete payoffs of internal operations measured in actual dollars and cents. Expensive ventures are often avoided using this model unless there is a high confidence in a large increase in returns. Accordingly, cost reductions are frequently pursued even if they will not create an increase in revenue.

ROI does not take into account an initiative's impact on processes and people, with partners and customers being the two primary audiences for online communication. Additionally, ROI fails to analyze immediate intangible returns that aren't measured financially, such as improved customer satisfaction or brand strengthening. The focus of ROI is just too narrow for the purpose of evaluating the full value of your online initiatives.

Apply a valuation methodology
Web initiatives should be less an evaluation of feature or function and more an alignment with business initiatives aimed at improving business processes. Rather than stating the project benefits in terms of a toolset, the project benefits become the same as the business benefit. For example, "Implementing an e-Commerce engine" becomes "Enabling customers to complete transactions faster and easier."

This is a straightforward and logical approach to creating a valuation strategy. Organizations that have taken time to define strategic initiatives are in the best position to utilize this approach. Critical discussions have already occurred and decisions have been made. Internal alignment can at least be assumed if not already achieved.

What about those intangibles?
Some examples of intangibles influenced by online initiatives are brand image, market share, employee satisfaction, internal culture improvements, shareholder loyalty, site usability, and customer satisfaction. These success factors have become critical benchmarks for seasoned business executives and managers.

Intangible elements are often emotional and driven by opinion. Their evaluation can be confusing and achieving a consensus can prove difficult. It is common practice to work towards converting intangibles into tangibles in order to gain quantifiable data. Often times, such conversion and measurement is possible but only after implementation. For instance, a site usability enhancement can be tracked in testing or once it is live by using Web server statistics logs.

It is important to evaluate the impact of an initiative on the intangible factors at the beginning of the project lifecycle rather than limiting them to plainly stated project goals. Figure 1 depicts the level of potential effect that each project initiative has on two different intangibles.

Figure 1

This analysis method can help assign priority to the initiatives that have the highest level of positive impact on the identified intangibles, which in this case would be Brand Strengthening and Integration.

A goal based evaluation
While there is no sure thing, a goal based evaluation consists of aligning perceived project benefits with predefined targeted business goals which already have inherent value to stakeholders. This approach requires that the project efforts as well as the business goals be identified. Value is based on the frequency that an initiative meets previously stated business goals.

Figure 2 is an example depicting frequency with an "X." In this example, the implementation of a content management tool meets all three business goals, outperforming the other two initiatives. The content management initiative receives an inherent value from this ranking.

Figure 2

On the other hand, business goals may be prioritized and the projects that meet the highest priorities may be addressed first. Keep in mind that assigning the relationship between goals and efforts can sometimes be a judgment call. Strive for consensus within the evaluation team before assigning a relationship.

The important thing to note in this analysis model is the relationship between goals and efforts. How you choose to prioritize based on the results is open for discussion. Just make sure to keep your analysis method consistent from project to project.

Evaluate effort vs. value
Another approach to identifying value and prioritizing initiatives is to weigh the perceived value against the level of effort. A clear depiction of this relationship uses a matrix, shown in Figure 3.

Figure 3

The goal of this approach is to identify and agree to value and effort placement and find initiatives that have the highest perceived value with the lowest implementation effort. This model has a similar equation structure to ROI which seeks the highest financial return for the lowest investment.

The value vs. effort analysis is largely based on initial perceptions but it can help identify and prioritize strong project candidates out of a large list of potentials.

Taking a combined approach
Value assessments do not minimize the importance of ROI or suggest that the ROI model be ignored. When attainable, it is always wise to evaluate the ROI. The widespread benefits that can be achieved from an increase in value to users and customers does beg that project benefits be evaluated using more factors than just financial means.

Value analysis factors in the potential impact on people and processes and takes into account risks. Positive and negative impacts from online initiatives can be felt in ways that financial models aren't capable of measuring, at least initially.

Conclusion
Today's business decisions are driven more than ever by hard numbers that show financial returns. Web initiatives have gone from ad-hoc efforts meant to keep up with the competition without cause or challenge to detailed justification processes. Now more than ever, it is critical to include the softer side of business in your evaluations…things like the customer, intangibles, value perceptions and implementation efforts.

It is not difficult to see the complexity and far reaching impact that Web initiatives can have on your business. Getting to an appreciation of this impact via a multi-faceted approach can be the challenge. Make sure to include some of the measurements discussed here along side your ROI evaluations to ensure the most in depth and thorough analysis that reaches beyond the numbers.

Article References

• Sawhney, Mohanbir. "Fundamentals of Value." Featured in CIO Magazine, (Jul. 1, 2003).
• Sawhney, Mohanbir. "Damn the ROI, Full Speed Ahead." Featured in CIO Magazine, (Jul. 15, 2002).
• Hayes, Mary. "Just Who's Talking ROI?" Featured in InformationWeek, (Feb. 3, 2003).
• Keen, Jack M., Digrius, Bonnie. "The Emotional Enigma of Intangibles." Excerpt from Making Technology Investments Profitable. Featured in CIO Magazine, (Feb. 15, 2003).
• Keen, Jack. "Don't Ignore the Intangibles." Featured in CIO Magazine, (Sep. 1, 2003).
• Apfel, Audrey. "The Total Value of Opportunity Approach." Featured on CIO.com, (Jan. 10, 2003).

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