The New Rules of Technology ROI

Defining the New Rules of Technology ROI

By Ian R. Lazarus, FACHE

The role of technology in advancing the strategic vision of a industry enterprise has officially taken center stage. Never before has technology been so dynamic and important to an organization’s success, both financially and clinically. Technology advances have required managers to quickly advance their own understanding of how technology can impact the organization. It heightens their sensitivity to the implications of technological obsolescence. And with computing power doubling roughly every 18 months, it frightens them just to imagine what is around the next corner.

Even managers with technology budgets often can’t keep up with the explosion in technology advances in industry. Worse than this, the hype and excitement of some technologies conceal the practical value of others. And all of these advances don’t alter the fact that most technology advances have had very little impact on health status or quality of life. Indeed, the Institute of Medicine has suggested that while the last century has produced 30 years of improved life expectancy, less than 5 years are attributed to the impact of technology. Similarly, industry providers would have a difficult time demonstrating that investments in technology have produced any demonstrable reduction in overall labor costs. The sobering indictment of the medical profession by French philosopher Voltaire in the eighteenth century appears true even today: “medicine’s role is to entertain us while nature takes its course.”

To be sure, measuring the potential impact of technology on a industry enterprise has never been so important, and yet so difficult. Unfortunately, many industry organizations are still struggling to implement measures to validate the projected ROI (“return-on-investment”) from technology, particularly those related to the Internet. According to a 1999 study by the DDN Group, 58% had no written strategy related to their Internet activities, and 65% have no ROI expectations from the investments they made on Internet marketing. The Pfizer Health Solutions (PHS) Information Technology Survey conducted throughout 2000 similarly finds that most ROI measures employed after implementation go no further than measuring member satisfaction from hospital or health plan-based customer satisfaction surveys. (See MANAGED industry’s continuing coverage of the Pfizer Information Technology Survey for more details).

According to some Chief Information Officers (CIOs), technology investments do not have access to the same arguments as competing investments, where the sources of funds and impact of investment may be more readily identified. This is principally because much of the value of technology comes from the creation of infrastructure to support operation of the enterprise across multiple departments. It is rare that such an investment can be justified solely by its impact on costs or incremental revenue. Still, the technology budget is increasing so much faster than other line items, it remains a vulnerable target and one under increasing scrutiny.

Finding the Formula

Today, the complexity of developing an ROI argument for some technology investments would challenge the most competent statistician. Consider the impact of imaging systems in hospitals, and its potential impact on cost of materials, labor, storage, maintenance and space. Add to this the potential impact of the technology on the quality of medical decisions and subsequent outcomes, and the difficulty of calculating an accurate ROI can be appreciated without effort.

It seems clear that the relative value of new technology cannot be ignored, but historical methods for determining the potential impact of technology investments are themselves becoming obsolescent. The importance of examining the rules for determining the return-on-investment from technology is reinforced by the fact that the industry industry expects to further accelerate investment in technology for the balance of 2000. A study conducted by Merrill Lynch in May found 50% of CIOs predicting an increase in technology spending over the balance of this year, and 78% predicting 5-10% growth over the next 3 years. At the same time, we see heightened interest in the potential impact of technology with recent attention to the rate of medical errors. All of this occurs during a period in which the Balanced Budget Act forces providers to be even more sensitive to the magnitude of their technology investments.

“If an enterprise insisted on using quantitative ROI measures to justify technology investments, they would likely not make many investments at all,” notes Frank Cavanaugh, a partner with PriceWaterhouseCoopers and head of the firm’s industry IT Strategy practice. “It’s simply not possible to set forth a sensible argument for investing in technology without tying the ROI to achievement of the organization’s strategic goals.”

Most CIOs agree with Cavanaugh. “Technology investments need to be evaluated in the same context as any other business investment,” argues John Glaser, Vice President & Chief Information Officer of Partners industry System in Boston, MA. “Many treat the rapid evolution of technology as creating a new set of physics. There’s a danger in this thinking as it might paralyze an organization as it tries to come to grips with the need to invest in the new capabilities that technology can offer them.”

Glaser compares a typical technology investment to other key decisions the organization must make. Each, he says, will inevitably contain many intangible components. “What if an organization considers freezing salaries for a year? The cost savings are easy to measure, but the morale implications, and other possible consequences, are nearly impossible to predict. Similarly, what if we consider recruiting a prestigious head for a clinical department? The incremental referrals and other benefits are not very easy to quantify. A very narrow series of metrics applied to technology ROI will suffer from the same level of uncertainty as some of these other decisions each administrator has to make.”

According to Cavanaugh, many organizations struggle with ROI measures and ultimately work too hard to find them. “There was a time when we looked at technology in very quantifiable terms, such as reduction in overhead expense, increased throughput, or incremental contribution to profits. Today, our measures are more esoteric, but equally or even more important. In the end, will the technology infrastructure we are building allow the enterprise to achieve its mission? This becomes a far more important issue.”

Cavanaugh uses as an example the recent decision of a health system to implement a “first generation” web-enabled electronic medical record system geared to the management of patient medications. The system would take information traditionally available to pharmacists and present the data on handheld devices for 6000 active users, including pharmacists, nurses and prescribing physicians. Total estimated cost of the project: over $40 million. “The system allows physicians to instantly see the impact of their prescribing decisions in terms of efficacy, interactions with existing medications, and potential side effects,” according to Cavanaugh. “It speeds up the process of initiating medication therapy, reduces prescribing errors, improves the process of scheduling follow up visits, accelerates recovery rates, and ultimately enhances the satisfaction of the practitioner and patient.”

But with all these benefits, notes Cavanaugh, the true ROI remains elusive. “The system would theoretically reduce malpractice premiums and prescribing complications, but this alone would not generate a compelling ROI. Patient fatalities without it are nearly impossible to measure, as are the accelerated recovery rates from producing the ideal regimen for medication therapy. In the end, the organization supported the project because it was consistent with their strategic goals to support their key constituencies with contemporary technology. Being ‘first to market’ with a first generation product also provided them with a perceived competitive advantage.”

Driving the New Rules

Why is it so necessary today to rewrite the rules for determining the ROI from technology? The answer lies in the ability of technology to rewrite the rules for business protocol, and the evidence that such changes are occurring right before our eyes:

1. Technology drives the market

Even without the introduction of new market dynamics in the industry sector, leading organizations will adopt new technology just as soon as it leaves the “beta” stage. Technology acceptance follows a traditional bell curve, described as the Technology Adoption Life Cycle in Geoffrey Moore’s Inside the Tornado, a book which in itself represents a milestone in our understanding of how technology affects society, and how society influences technology.

It all begins with “technology enthusiasts” and “early adopters” which form the basis for establishing the commercial viability of any new technology opportunity. Once technology has established a foothold among these pioneering new customers, the more conservative and reluctant buyers will need to invest similarly in order to remain competitive in a marketplace already moving toward a new technology standard. The “tornado” effect occurs when some form of “breakthrough technology” becomes accepted by the market as the new de facto standard, and the dynamics of the market change dramatically as the supplier seeks to satisfy the enormous emerging demand for the new product.

The mere fact that more and more emerging technologies have the opportunity to create a new de facto standard requires us to rethink those traditional ROI exercises that ignore market dynamics as a tangible factor in investment decisions.

2. Technology advances have changed the paradigm for business protocol and processes

In the industry sector, the availability of web-based technology solutions has the potential to drive change even further and faster than in other service industries. The industry has already invested millions in the deployment of disparate systems that cannot communicate with each other. With the availability of applications accessed over the Internet, previous obstacles in moving information across the enterprise become irrelevant. Proprietary systems will become viewed as impractical, rigid and obsolete as the industry flocks to web-enabled applications that allow information to be exchanged among physician offices, HMOs, hospitals, pharmacies, labs, health plans, and alternative delivery systems.

It seems clear that the evolving paradigm toward technology emphasizes its deployment as a service, rather than a product. In the old model, for example, technology enthusiasts valued products with maximum functionality, and computers with maximum speed and capacity. The Internet has altered this paradigm, however, and enthusiasts now value the quality of content they can access over the web, better tools to search for them (making the services more useful), and the most reliable connectivity (bandwidth). This changing paradigm has given way to an explosion in “application service providers” offering services over the net, and has given rise to a paradigm focused more on “clicks” than “bricks.”

3. Technology advances invite new business models and new competition

The healthcare industry has historically been insulated from the impact of technology relative to other services industries, where just 4% of revenues are invested in technology compared to 10% for other service industries. This, however, makes the industry vulnerable to the encroachment of smaller, more flexible organizations that develop new business models around the business of health. The remarkable growth of certain e-Health companies (Healtheon/WebMD,, etc.) challenge conventional wisdom of how industry will be delivered in the new Millennium, and industry organizations, both providers and payers, need to pay close attention to how these developments will alter market dynamics in their own backyard.

Technology has already demonstrated, with sometimes dramatic effects, the ability to alter business models and drive market share away from large, established players. Witness the impact of on Barnes & Noble, E*trade on the established brokerage firms, Etoys on Toys R Us, and on your local travel agent. From this perspective, the implications are clear for service industries that do not leverage technology to meet customer expectations. Customers will “vote with their feet” in the new era of consumerism, and new business models for accessing industry already provide them many options.

In search of “Killer Apps”

“Our perspectives on technology have evolved from seeking efficiency to achieving ‘business effectiveness,” notes Jim Hudak, CEO of United Health Technologies, a business segment within United Health Group. “While at one point we measured how much technology costs were declining as a percent of revenue, now we seek technology to both support existing business, and to take us into new businesses.” United’s creation of an independent business segment illustrates their commitment to leveraging technology for both core business and diversification activities.

The idea of leveraging technology to open new markets represents a fundamental shift in previous views toward technology. “We often fool ourselves by holding firm to the notion of being local providers,” notes Steve Pelton, Chief Information Officer from St. Josephs Hospital in Marshfield, WI. “But the truth is, the Internet makes us part of a global community.” According to Pelton, when new business models are appearing in an established market, it is impractical and even dangerous to apply traditional decision rules that ignore the dynamics of the market and the need to keep pace with it. “We cannot move as quickly as some of the ‘dot-com’ companies now competing for attention in our market,” notes Pelton, “and its clear these companies seek forms of revenue that can only come by interfering with market relationships that we have already established. We need to be active participants in the new economy or we will lose share to these emerging players.”

Codifying the New Rules

How can administrators best support the efforts of their technology departments to develop sensible expectations from future investments?

1. Tie systems to strategies.

If investment in a new system or technology tool does not support the organization’s strategy and mission, it should be questioned why the proposal ever reached the decision stage.

2. Look outside and beyond.

To gauge just how well the organization has invested in technology overall, it is useful to look at other industry organizations, and other industries. This can be a dangerous exercise in isolation of other considerations since there can be dramatic differences across markets where the level of competition (a key driver of technology investment) differs. Still, the level and type of investment by high performing organizations provides an important perspective on how well any organization is positioned relative to technology assets.

3. Recognize the why and when of obsolescence.

Technological obsolescence is a given. In many cases, it comes quickly. The rapid deployment of many web-enabled programs will come under new challenges, for example, when wireless technologies enter the market and offer even more flexibility to end users. If an organization is to remain competitive in technology, it should recognize that obsolescence is acceptable, even desirable, in upgrading certain systems. In other areas, it is not so desirable, especially if the cost to retrofit existing systems exceeds the incremental benefit of the new tools. Recognizing when obsolescence is “OK,” and when it can be expected to occur, is key to making rational investments in new technology.

4. Invest in the new; starve the old.

Studies have proven that organizations which enjoy the highest returns from technology overall will have a disproportionate amount of their total budget allocated to new and emerging technologies. To enjoy similar benefits, organizations must realize it will mean less investment in legacy systems that might be overdue for upgrades. This is an uncomfortable position to take in any environment, and the tendency to do the opposite is to deny the existence of the New Rules.

5. Invert the investment process.

With the rapid obsolescence of existing technology and the introduction of enhanced technologies, its simply not practical to base decisions on what the expected technical environment will be in the future. This calls to question the very formation of a 3-5 year technology plan. “Technology moves so fast that it enables strategies we didn’t even know were possible several months ago,” cautions St. Joseph’s Pelton.

A better approach is to look at what can be realistically impacted today, with incremental goals that allow flexibility in how the ultimate solution is configured. This was the approach employed at United HealthGroup in the total redesign of their internal billing system. “The organization had been discussing a new system for about 4 years,” recalls Hudak. “but with a $70 million investment over a 2 year implementation period, we just couldn’t get the support necessary to get the project underway. When we looked at achieving the goal incrementally, with the focus on a new release each quarter, we saw the business benefits as more near-term, and with lower total risk. We are now well on the way to reaching the complete solution originally envisioned.”

Applying the New Rules

Once the rules have successfully justified an investment decision, its critical to not only achieve buy-in from affected departments, but to delegate responsibility for the success of the implementation beyond the IT department. Ultimately, the IT department should be viewed simply as an enabler of the optimum technology infrastructure, and in a supporting role to those that will benefit most from the investment. Most CIOs note that this is still an emerging philosophy among industry organizations, where many still depend too heavily on their IT departments to generate interest and enthusiasm in emerging technologies.

While the New Rules reflect many of the principles of the new economy, they should not be nearly as difficult to apply as some of the quantitative measures once favored as the basis for ROI calculations. And there is nothing in the New Rules that would suggest an abandonment of quantitative goals in measuring technology effectiveness; the Rules simply call for a broader perspective. “Frankly, you need not be a technology expert to make sensible investments,” notes Partners’ Glaser. Just keep asking questions until you understand the value proposition being suggested. At the end of the day, if your still not comfortable, it probably best not to invest.”

Ian R. Lazarus, FACHE, is Managing Partner of Creato Performance Solutions ( a consulting firm focused on biotechnology business development, and a member of the MANAGED industry Editorial Board.

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