Cut your losses or reevaluate? The five key IT investment questions to ask

By Sebastian Grady

April 29, 2021

Audio version

5 min reading

Today’s CIOs and CFOs need to be very prudent with their IT budgets. For many companies, it’s a question of survival given the current challenging times, with IT budgets under tremendous pressure in most industries. It also depends on the stage your company is in — survive, stabilize or thrive.

One of the most important signals that it’s time to kill a specific IT investment is when it becomes a money-losing effort with no end in sight. This is a challenge, however, because most IT projects don’t have a well-defined cost ROI model. The lesson learned in many of these projects is to spend much more time on the ROI or value proposition before approving the project.

What a misguided investment looks like

Consider the example of European-based fleet management company LeasePlan. It announced its massive ERP failure in the second quarter of 2019, taking a €100 million ($110m) write-off and pulling the plug on the entire project. What went wrong? Like many past incidents such as those at Lidl, National Grid, and Haribo, LeasePlan’s ERP implementation failure could – and should – have been avoided.

There were many warning signs that should have tipped off the company, its team, and its consultants that this was going to be a very difficult project, ranging from a herculean task of consolidating 35 systems into one system to the company’s CIO touting its “extremely aggressive plan” for a big-bang rollout strategy without an apparent clear understanding of the cost or risk involved.

For many companies, a ‘rip-and-replace’ migration to the vendor's latest platform has a questionable return on investment for licensees  successfully operating on mature, feature-rich existing platforms. Accounting for licensing and support, hardware, implementations and upgrades, we estimate this type of migration would cost a whopping 35x the annual maintenance spend to migrate to and operate the new system over a seven-year period.

Key questions to ask

Such ERP refreshes or big-bang migration projects that do not support a strategic priority and drain precious resources during such challenging times should not move forward. If underway, make sure there is a clear and well-calculated ROI to justify continued investments; if not, it is likely time to pull the plug. There are five key questions that should be considered:

1. What will be the organizational impact of this initiative?
2. What other initiatives are competing for the same resources, including labor, time and budget?
3. Are there other initiatives more important at this crisis phase?
4. Does this initiative need to proceed now?
5. Can this initiative be deferred?

Despite the pressures they might feel, CIOs need to be bold and say no if the project is not going to move the needle. Paying attention to this signal is key as major hardware and software vendors may claim they have the digital elixir for all your pandemic woes. Don’t get me wrong – there are some good ideas out there. But if you think about it, these major vendors tend to make more money when a business migrates or upgrades to something new regardless of whether it is the right business move or not. This leads to so much change for the sake of change that doesn’t usually have an actual value proposition for the business. Companies that will not only survive but thrive are those that will take a hard look at every new project and every new IT vaccine everyone is trying to sell you. Every line item of the budget must be reviewed and prioritized. It could even mean the difference between growing and dying.

In most cases, IT leaders should consult their end-users and specific beneficiaries on the ultimate value before starting a project. Unfortunately, the reality is most IT projects don’t follow this rigor, resulting in a bad decision from the start. End users and other stakeholders are often informed after a decision is made to kill the project. This miscommunication (or lack of communication altogether) can have a wide-ranging impact, from low employee morale to change management and attrition of great talent.

How to avoid ineffective investments

One key that businesses should bear in mind is to ensure their technology vendor contracts are written correctly with the right exit clauses which can help minimize damage from an investment. In addition, businesses should start small where possible to help gain early wins as you expand their project scope. Consider partners that are open and flexible versus proprietary vendor models that may lock you in.

Public cloud infrastructure providers like AWS, Azure and Google Cloud Platform are great examples of flexible and low-risk models that offer the ability to scale up and down as the business requires. With this approach, it is no wonder that AWS reported $13.5 billion in annual operating profits in 2020, or more than 63% of the company's entire operating profits for the year. Having grown steadily in the 30% range the past few quarters, AWS is a frontrunner to other cloud computing platforms.

Rather than spending millions of dollars on an aging data center, businesses should consider vendors and models that can not only provide better savings, service and performance, but also those that offer a low-risk exit depending on changing business and market conditions.

In the end, CIOs need to learn to be tough on themselves and hold internal stakeholders and vendors accountable. Everyone who believes that an IT project is important must present information and evidence that the project will move the needle for the business. It can be difficult, but those that resist upgrades from the major IT vendors and change solely for the sake of change – instead only taking on projects that support a strategic priority with a clear ROI – will be among those who give themselves the best chance of success.