Academic journal article Interdisciplinary Journal of Information, Knowledge and Management

A Return on Investment as a Metric for Evaluating Information Systems: Taxonomy and Application

Academic journal article Interdisciplinary Journal of Information, Knowledge and Management

A Return on Investment as a Metric for Evaluating Information Systems: Taxonomy and Application

Article excerpt

Introduction

Public attention to ROI has a clear dependency on the state of the economy. Rough times bring about tougher competition of projects for available dollars and spur the interest of academics and practitioners in evaluation methods, and ROI is a significant tool.

A renewed focus on ROI can be observed today, including using ROI as a buzzword to confound understanding rather than clarify meaning. A Google search brings back millions of hits which mention ROI. New pages and updates appear at a staggering speed of increase of thousands every 24 hours. An even more specific Google search for an "ROI calculator" shows over several hundred thousand pages. The number grows several times every year. The abbreviation "ROI" is arguably one of the most frequently used business abbreviations, now often used without spelling it out.

So, while the term is popular, there are completely different views concerning its use.

One view is that ROI is "the most popular" metric to use when comparing the attractiveness of one information technology (IT) investment to another. ROI is a key metric used by CIOs to help quantify the potential success of an IT or business project ("Return on investment," n.d.).

The other view is to "forget ROI. The best, most innovative IT improvements have no ROI. There was no decent ROI on installing the first Wang word processor in the 1970s or the first PC to run VisiCalc in the 1980s or the first Linux server for corporate Web sites in the 1990s. ... If we let the ROI Wormtongues rule the day, this decade will never see an analogue to the technological achievements of past decades. ...wisdom can't be reduced to an ROI calculation" (Hall, 2003).

While those are two extreme views on the use of ROI, there are dozens of views somewhere in between them. This diversity of opinion is what stimulated this study to review the current state of the issue and help provide greater understanding of ROI and its application.

What is ROI?

According to the Investopedia, ROI is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio ("Return on Investment--ROI," 2011.). The return on investment formula:

ROI = Gain from Investment - Cost of Investment / Cost of Investment

There are many other ROI definitions in the literature (e.g., "Rate of Return," n.d.; Goetzel, n.d.). Each definition focuses on certain ROI aspects. Such definitions reflect the fact that approaches to ROI and even ROI concepts vary from company to company and from practitioner to practitioner; most likely every consultant has a particular variation. Despite the diversity of the definitions, the primary notion is the same: ROI is a fraction, the numerator of which is "net gain" (return, profit, benefit) earned as a result of the project (activity, system operations), while the denominator is the "cost" (investment) spent to achieve the result.

However, in some publications, the numerator in the ROI formula is equal to the project "gain" (not gain minus cost) (Mogollon & Raisinghani, 2003). Usually, this metric is called benefit-cost ratio. It should be noted that in such cases the results of the calculations have a different meaning. For example, ROI of 100% means that the amount of the return equals the amount of the money invested--no additional money was gained. A more common sense use of the above formula, one hundred percent ROI means not only the return of the money invested but also gaining the same amount as profit.

The definition from Investopedia treats ROI as a measure / metric / ratio / number. In some cases, return on investment is understood as a "method" or "approach"--"ROI analysis". In this meaning, ROI or "ROI Analysis" includes not only an "ROI ratio" but also several other financial measures (e. …

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