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Unformatted text preview: sitive NPV. The reader interested in learning more about this technique should see any second- or MBAlevel managerial finance text. CHAPTER 10 FOCUS ON e-FINANCE Risk and Refinements in Capital Budgeting Putting the “R” Back into ROI Ever since the economy faltered in late 2001, information technology (IT) managers have faced increased pressure to measure returns on technology investments and to show higher ROIs and faster project implementation. Managers must justify projects, proving that they support strategic business goals, and then track progress against expectations. Another key trend: Companies are moving IT approvals to more senior levels of management in order to evaluate better the projects’ overall impact on the company’s business. In a poll of Computerworld’s “Premier 100” IT companies, almost half of the respondents said they do not perform ROI analysis on proposed IT projects. For the 43 percent who calculate potential paybacks, nonfinancial, “soft” factors are an important part of the analysis. The chief information officer (CIO) may con- sider certain projects—for example, business-to-business (B2B) commerce—essential to the company’s future. Methods and metrics to assess ROI vary among companies. Illinois communications equipment maker Tellabs Inc. established a stringent proposal-and-approval process for IT projects. This formal analysis now includes project comparisons. Another important change is accountability. “In the past, we haven’t gone back and done measurements after a project went live to see how much we did save or how much we didn’t,” says Cathie Kozik, CIO and senior vice president. Tyco Capital, a New Jersey financial services company, takes a different approach. To reduce risk and boost returns, CIO Robert Plante divides large projects into smaller phases and measures ROI along the way, not just on the total project. This “plan, do, test, react” 429 In Practice process enables the company to test the...
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