A substantial portion of IT spending has so far escaped scrutiny.
Largely because of a lack of know-how, many IT executives are letting the millions of dollars they spend on IT consulting slip under the ROI radar, so those costs aren’t factored into the business case for expenditures.
As IT infrastructures grow more complex, consulting services play a bigger part of the total cost of IT, says Rebecca Wettemann, vice president of research at Nucleus Research, a return on investment (ROI) consulting firm.
“The greater the business value of an application, the greater the need for expert services to help implement it,” she says.
The trouble is, many companies are having a hard time coming up with metrics that demonstrate whether the consulting services are worth the extra cost. In fact, two-thirds of Nucleus’ clients don’t know how to justify the cost of consulting, Wettemann says.
Researchers at Kennedy Information say that large companies typically spend up to 1 per cent of their annual revenues on IT consulting, which is quite a bit, considering their earnings. In fact, the cost of consultants is often double or triple that of the hardware and software they help implement. That adds up when a CIO requests funding for a major project such as ERP (enterprise resource planning) systems.
“ROI from consulting has to be looked at through the larger prism of the product purchase,” says Anna Danilenko, an IDC analyst. “Users in the US are spending $3 to $4 on consulting services for every $1 they spend on hardware and software.”
Often, satisfactory payback on a technology purchase can’t be realised without outside help. It’s hard to achieve ROI when a new software system isn’t up and running in a reasonable amount of time. In such situations, consulting can become a necessary expense that helps justify the total cost of a project.
That was the case for Roger Parks, CIO at JR Simplot, a $US3 billion global agricultural business. Three years ago, the company hired IBM Global Services to help implement a JD Edwards ERP system. For Parks, the key ROI metric for the consulting portion of the project was simple: all he had to do to justify the cost was calculate the time he saved by using outside assistance.
“With our in-house resources, it would have taken three years, but IBM Global Services did it in one year,” Parks says.
This turns out to be a common but rather elementary metric for calculating the ROI of IT consulting. If an expensive engineer can get a job done substantially faster than in-house personnel the company comes out ahead. A single consulting engineer might be able to accomplish as much as three in-house engineers could, says Tom Pisello, chief executive officer of ROI consulting firm Alinean.
“When you buy HP’s SAN products, the company can provide these superengineers to help set it up,” he says. “They’re more expensive than an in-house engineer, but they’re also more effective.”
Whether or not consulting expenditures are worth the cost can also be measured in terms of the business value gained. Parks hired IBM consultants who had payroll, procurement and other types of expertise, and that helped his company get the most out of the ERP software.
“The consulting enabled us to do the things that would allow us to achieve ROI. Just putting in the system wouldn’t give us the same benefits,” he says.
Wettemann puts it another way: “ROI is really a measure of delta. Measuring ROI from consulting services is a question of what I would have to do to get to the same point without them.”