Almost every working day, I have some minor variation of the same conversation about IT with a business owner or C-level executive. It goes something like this:
“How much is your IT investment returning to your business?”
“I don’t really know.”
Reversing the Misunderstanding of IT
As an IT strategist and consultant over the last two decades, I’ve had this conversation in pretty much every level of every type of organization: every sector, and every organization size.
The defining attribute of an Asset is its ability to provide a return on the investment (ROI) . And most business leaders don’t have any idea of the ROI they get on their IT investment. Why?
“What’s the ROI on my IT asset?” is a question conspicuously absent across more than just organizations that are end-users of technology. VARs, IT manufacturers/publishers, and technology implementers start the cycle by avoiding the question, which becomes a Kool-Aid readily drank by leaders of the IT departments that purchase from them.
Let me share one example from working with a Sales Manager in a Canada-wide enterprise VAR/LSP who built an all-day training session for his national sales team of about 15 reps premised on this statement:
“IT is just hi-tech plumbing. And we are the plumbers of the electronic enterprise”.
Plumbing: unseen, but necessary. …and a little on the gross side.
The only time the subject of plumbing comes up is when it’s broken. We just assume the plumbing is there for us, along with its ability to keep things flowing. The last thing anyone wants to discuss is what travels through the pipes (ick!).
So, if the VAR community, who theoretically should be the most value-conscious group in the IT world, thinks of IT like plumbing, then why bother seeking out ROI values? After all, no one calculates ROI on plumbing.
The root challenge is this: ROI is only expected from an asset, not an expense.
Why Do Business Leaders Not Consider IT an Asset?
Typically, business leaders view IT as an expense. Why?
Here’s some of the rationale I’ve gleaned from clients over the years.
“IT is a super-rapidly depreciating asset.”
That comes from an accounting department perspective. The stand-alone resale value of IT hardware and software reaches the point of zero asset value in 2 years (in most cases, see CRA depreciation classifications list for general computer equipment here).
One reason IT hardware, more than other assets, depreciates so quickly is that IT, more than any other industry, is propelled by competition among vendors to bring their rapid technological advances to market faster than their peers.
Consumers so rapidly adopt advancements in IT that they render previous technologies useless. What’s more, software has the stigma of being largely intangible.
You can get the physical DVDs software at literally a dime a dozen. And the practice of downloading programs from the internet has surpassed sales of physical media, which means most software programs have no physical properties whatsoever. Not even the notorious End User License Agreement, or EULA, has a place in the physical world anymore.
In fact, a burgeoning business segment has arisen on the heels of rapid IT depreciation: charitable donation of computer hardware and software from organizations that would’ve otherwise simply thrown it into the recycling bin after 2 – 3 years of use.
While IT is still considered a depreciating asset from a GAAP perspective, the result is both hardware and software are increasingly utilized as consumable commodities. The evidence comes from the emerging growth in offerings of nearly all IT functionality in “…as a Service,” or “XaaS,” formats, which allow an individual or organization to rent whatever IT functionality they require effectively.
“If I have to constantly spend money to update it or risk it becoming obsolete in 24-36 months, how can it be an asset?”
Race to zero asset value = Operating Expense
“IT is only useful to administrative activities.”
IT initially came into business use as an efficiency-boosting tool that replaced many administration-type devices.
Word processors replaced typewriters. Spreadsheets replaced calculators and layered pages in a bookkeeping ledger. Businesses began to store files electronically. And much like purchasing paper, many businesses replace pens, file folders, and sticky notes so frequently that IT is practically a consumable — albeit a really expensive one.
Admin = paper + pencils = Operating Expense
Within most organizations, internal IT personnel are “everyone’s repairman”; great in a crisis, but otherwise unneeded.
Repairs = Maintenance = Operating Expense
“I’m wary of adopting more IT into my business profit center(s) — if it’s not broken, why fix it?”
The operations department (aka the department where the money-making activities happen), sees the oft-changing parameters of IT as risky.
In Alberta’s energy sector, it is commonplace to find IT used for business operation (i.e. IT used to run processing plants) made up of technology that is 5-7 years behind current standards because they consider it more trustworthy.
Operations IT is carefully segregated from the IT they use for corporate activities (i.e. accounting, human resources, document storage, etc) in its own discreetly firewalled environment. In addition, there are people who use it to serve only the operations department, for fear “the corporate IT geeks” will break something valuable.
Potentially diminishing the value of other assets = Not-an-asset = Operating Expense
“Even if I wanted to, I don’t know how to calculate the ROI on my IT.”
From both an accounting and an executive perspective, the principles for exactly how to calculate ROI from IT have neither been universally understood nor well adopted.
As such, accounting for current IT asset values is exceedingly challenging. And forecasting future IT asset values that result in something greater than zero over 36 months is a near impossibility. So why bother?
No forecastable ROI = Operating Expense
If the trend is to perceive IT as an expense, then why should I see it as an asset?
You’re already making an investment in your IT, so the real question is: Can you accurately measure the return?
Just How Will IT Prove to Be a Return on My Investment?
Like any other business asset, you can most accurately determine IT ROI based on its effective increase in the performance of the organization.
The best way is by structuring your IT around improving your business processes through automation. Ideally, this would be in a way that either measurably reduces expenses or increases revenue. The difference between these improvements and the cost of implementing them is profit. THAT is your ROI.
At Inspiris, the way we start is by helping our clients understand the processes that make their business make money; each step, in detail. From there we calculate which steps make financial sense to automate. Then, together, we select the appropriate automation solution that we implement against a pre-determined ROI.
Typically, after a single consultation, our clients have come away with a solid understanding of the parts of their business that they could most effectively automate, what’s involved in the process, and an idea of the cost.
We can help you structure your IT investment so it becomes an asset, not an expense.
Schedule a FREE Consultation here with our expert team of IT strategists.