No Proof, No Project
The ""governance model,"" says Balliet, requires looking at a number of factors before making ROI decisions. ""We have some target financial-hurdle rates (of return), but we approve projects that don't meet those rates because there are a lot of other non-financial measures that clearly indicate we should go ahead with the initiative,"" he says. ""And there are times when projects meet the financial-hurdle rates but we opt not to go with them due to some other non-financial reason.""
Merrill has developed this governance model for investments around applications rolled out to about 8,000 users in its Global Technology and Services Group. Merrill has been using the Business Engine Network (BEN) by Business Engine for some time as the financial tool for technology investments and is now replacing its project-management systems with Microsoft Project, which integrates with the BEN.
The BEN is a Web-based enterprise application that is hosted by a Business Engine provider, in Merrill's case, but can also be hosted within the enterprise. The system tracks the complete lifecycle of an IT organization, says John O'Neil, chairman and chief executive of Business Engine. He explains that IT projects are usually divided between the ""lights on"" everyday technology, and projects like entering a new market or building a new system.
The actual ROI process is embedded within the BEN and organizations can set up their own templates for determining the standards a project must meet. ""In addition to budgeting what the project is going to cost, users also budget what the proposed payback will be, so that two months into the project they can check back to see where they are and where the ROI is,"" O'Neil adds.
""I have all of my financial information around a project in the BEN. I have all my resource information around a project in the BEN and the idea is now we can look in one place and see everything about a project,"" says Balliet. ""We can sit down and have very timely discussions with the business people and we can play what-if scenarios, rebalancing that portfolio and trying to see if we need to slow projects down or speed them up, depending on where we think the payback is and the time sensitivity of delivery.""
The BEN also helps Merrill manage IT spending on a global basis. The firm has about 600 technology people based in India who report their time spent working on projects directly into the system. ""We have certain projects where we actually have four different development centers working on it - some stuff done in Japan, London and the U.S. and we also have people in India working on it,"" says Balliet. ""We know our best FX people are sitting in London, our best order-processing people are in Asia and then we have the best people for regulatory issues in the U.S.""
Bringing it all together is important, says Balliet, who adds that the BEN lets a project manager see how the project is doing in each location and manage the project effectively from wherever they are located.
Merrill began the BEN installation in November of 2001, with the final installation scheduled for completion in November 2002. The 8,000 users constitute anyone who touches a project, from technology heads to developers. ""It's a one-stop shop for everything you need to know about a project,"" adds Balliet.
Citibank Tackles ROI
Citibank Global Securities is also in the midst of revamping its ROI strategy. ""It's been about an 8-month journey and we realized you have to look at the product as the components that are in the product and understand how you're delivering value to the clients. You have to also understand the impact of changes in those variables to see how it actually impacts your return,"" explains Jon Howell, vice president and program director Net Solutions at Citibank Global Securities Services, which comprises custody, clearing, agency and trust, and depository receipts.
Previously, the group had been using many different ROI models - some formal, some informal - depending on the type of project, says Howell. He adds that developing a more generic ROI model for use across the group was important to create a ""code of ROI for the business.""
Citibank Global Securities initially worked with consultants to build an internal model for ROI and then enlisted the help of iValue, a consultancy focusing on the valuation of information technology. iValue simulations ""fit into what Wall Street perceives as creating value,"" says Ray Trotta, co-founder of iValue. Citibank went to iValue to verify its own model and see how it overlapped with the iValue ROI model.
""iValue validated the overall structure of the model and basically said these are all the key indicators,"" says Howell. He adds that iValue also recommended focusing on sub-indicators, which take an even more in-depth look at the factors surrounding an IT investment. Howell says that he plans to take the internally developed model along with the iValue recommendations to develop a generic model for ROI that can be used for everything. ""The inputs will change and some of the assumptions will change, but basically the methodology will remain the same,"" he says.
Chris Gardner, also a co-founder at iValue, describes the iValue ROI models as economic simulators with valuation models built in to tie results back to value. ""What we are really doing is applying the principals of corporate finance,"" says Gardner. The iValue approach is based on discounted cash flow, which utilizes cash flow instead of profits and takes into account future cash flow rather than prior performance, says Trotta.
Leveraging this approach, the Citibank Global Securities model is built in Excel and integrated with outside software for Monte Carlo simulations. When a project is run through the model, a series of demand curves are spit out to help understand where the value is being extracted, says Howell.
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