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Part - VIII

Financial Benefits: The financial performance of the investment could be examined to see whether the financial returns achievable meet the specific needs of the organization (payback period, hurdle rates, etc.). Managers need to see if the project generates returns greater than the hurdle rate. This is important because IT investments generally involve high start-up and installation costs and combined with over optimistic savings forecasts, the investment could finally end up not being able to meet its targets.

An example of a well thought after IT project is the implementation of an IT renewal plan in Frito Lay. In 1983, when Frito Lay found that it became harder and harder to manage the ever increasing information needs of its sales force, it decided to migrate from its existing paper based information systems to risky, emerging handheld technology for the sales people on the street as well as a transformation from batch accounting to online operating systems. All this required enormous budget spread (at that time) over a period of 4 years (1984-88) - $40 million for the handhelds and $100 million for databases and core systems. However, this shift enabled the company to save between 30000 to 50000 hours of paperwork per week. By 1988, the savings resulting from better control over sales data came to more than $40 million per year. Frito Lay was also able to reduce stale product by 50% and increase domestic revenues from $3 billion in 1986 to $4.2 billion by 1989.

Intangible Benefits: In today's world of increasing competition, companies are forced to look at ingenious ways of serving customers. Customer service is the buzzword in most industry circles today. IT, along with the help of advanced telecommunications technologies, has played its part in enabling companies to set up excellent customer-service capabilities. IT also helps companies in quickly responding to changes in the external environment. These benefits are hardly, if at all, quantifiable.

Although intangible benefits are an important consideration, businesses often discount them in the final decision making process since they do not deliver immediate results. However, if pursued, they can represent the richest sources of ultimate yield.

To illustrate, an investment in automation of a manufacturing process might be designed to decrease its total process time and reduce handling defects. This investment would likely show a tangible benefit in terms of lower net unit costs resulting from higher process yields (less material usage) and higher throughput (more units per $ of labor and capital costs). When associated production volumes are known, it is relatively easy to quantify the tangible benefit of the investment and predict its payback period - and also to measure the actual results. In this example, intangible benefits might include perceived reliability advantage over competition, reduced worker fatigue, and the potential for patenting the associated process improvements.

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* Contributed by -
Mrugendra Shintre,
Manoj Kumar Gaddam,
II Year,
IIM Lucknow.