Jan 01 2005

Dollars and Sense

Business needs—rather than financial analyses—should drive tech investments

Justifying IT purchases isn't always an exact science at Nutrition 21 Inc., a supplier of dietary and nutritional supplements for people with diabetes and other health-conscious consumers.


When the 30-person company needed new servers and operating system software recently, the staff didn't undertake a formal "running the numbers," return-on-investment (ROI) analysis. Instead, IT administrator Dave Pagura acted on the belief that the new technology made business sense. At the Purchase, N.Y.-based small business, senior managers travel constantly to customer and supplier sites. "They needed a virtual private network (VPN) so they could access their desktops from remote locations," he says.


This approach to ROI isn't unusual at small companies. Although small firms aren't as bound by cost-benefit analyses as their corporate cousins, a solid business case should still underpin IT decisions, experts say. Determining whether a potential technology purchase will help the company avoid costs or increase business is always worthwhile, notes Gordon Corzine, owner of Corzine IT Consulting, Marblehead, Mass.


In addition to considering the performance capabilities of a new IT purchase, small companies also should evaluate technologies according to their productivity-boosting potential, since people costs are among the biggest expenses small companies face.


Next Wave Logistics and W.H. Trading LLC let those considerations guide their technology investments. "We purchase based on what we need to handle new business and clients," says Robert Thornburg, director of network operations at Next Wave Logistics, a Naperville, Ill., company that provides Web-based solutions for direct sellers, sales-force and customer-service automation, online communities and fullfillment and distribution. "We try to be proactive and not wait until we outgrow a piece of equipment. My rule of thumb is a system has two or three years before it outlives its 'taxfulness.'"


W.H. Trading, a Chicago financial trading company, also mirrors this approach. "This industry tends to be less price-sensitive and more functionality-sensitive than many others," reports Mike Madigan, chief technology officer. "We evaluate IT expenditures not so much in terms of ROI, but according to what we need to get the job done."


Some technologies don't lend themselves to hard financial analyses. Security hardware and software, for example, are essential even if they don't reduce operating expenses or drive growth. "The ROI in this case is the survival of the company," says Jason Harrison, president of Harrison Technology Consulting, a small-business specialist in Nashville, N.C.


The fact that some small companies don't take a strict financial-analysis approach to ROI doesn't mean their checkbooks are perpetually open. W.H. Trading let business trends guide a recent network upgrade. The company was torn between buying an economical $6,000 switch that could easily handle current and near-term traffic volumes and a higher-performing $25,000 model. "We weren't sure our future business would justify the more expensive switch," Madigan recalls, "so we bought the lower-cost equipment and decided to see where we are in six months."


By mid-year, the company will reevaluate the decision and stay ready to upgrade if necessary, he adds. At that time, they'll determine if they need more than the basic switch to maximize the IT investment.


CEO Takeaway
Keep IT Honest
The latest and greatest technology can be irresistible to IT staff. But how can company leadership distinguish between cool new stuff that represents state-of-the-art technology and tech tools that boost the bottom line? The following questions will help prod eager IT experts to build a business case.
What business problem will we solve by installing this new technology? How does the technology address the problem?
Will the new technology require a change in current business processes? How will these changes make us more efficient, avoid costs or generate new revenues?
What "soft" costs, such as installation and training expenses, are associated with the new technology? What is our total cost of ownership for this project (cost and lifespan)?
Once we implement the new technology, how will we measure success?