And who would argue with that? Few financial metrics appeal to common sense like ROI. In basic terms, ROI quantifies the financial benefits of a project after subtracting the associated costs. Before funding IT initiatives, managers use ROI analysis to determine which projects merit funding. They may revisit ROI at the end of the project to measure actual performance.

But ROI is an elusive target in practice. This is particularly true for e-business because the goals of and technology used in most e-business projects are not as familiar to business management and IT staff as such traditional IT projects as expanding a network or implementing an ERP system. E-business projects often involve intangible benefits and processes that span multiple departments. These factors make it difficult to project and track an e-business project's ROI. You'll have a much better chance of responding to the demands for ROI if you understand the pitfalls of ROI analysis and how to avoid them.

Although ROI numbers may appear concrete, they can be misleading. "You can create the math to prove anything," says Gerhard Cerny, CIO of Siemens Business Services. Cerny says that unless ROI analysis is applied accurately and honestly, there is ample room for delusion. "As we say in IT, I don't believe in any numbers I haven't massaged myself," he says.

ROI numbers often come from the guesswork IT managers use to justify projects to senior management. A recent study from Jupiter Media Metrix points out that e-business ROI studies are often conducted by in-house staff--workers who may not be sufficiently objective or adequately trained to conduct such analysis. The study found that 59 percent of in-house ROI studies generate a positive result and that only 17 percent of the surveyed companies hired outside firms to conduct or oversee their ROI studies.

ROI analysis works best for projects that are easy to measure and are likely to yield such tangible cost benefits as lower headcount, reduced transaction costs, or lower inventory levels. ROI is not an effective tool for evaluating e-business initiatives that produce intangible benefits such as customer satisfaction or improved communication. ROI favors cost-cutting initiatives over projects aimed at revenue growth. ROI analysis may do nothing for a company that is grappling with a change in the competitive landscape or overall business environment. For example, research and development projects may not make a strong ROI case, but companies that fail to innovate will eventually be outpaced by competitors or miss growth opportunities.

A variety of alternatives to ROI exist for managers to assess the value of intangible benefits. "Business value added" and "intangible value" are both concepts used to describe how IT dollars support key business goals that aren't easily quantified. "Return on opportunity" helps companies examine top-line growth potential rather than focusing on cost savings. "Return on relationship" acknowledges the intangible nature of e-business by measuring whether relationships produce direct or indirect returns to a company.

Net present value (NPV) is a more traditional concept that is used to measure future returns in today's dollars. NPV aims to normalize variations on returns that occur over time due to such factors as inflation, changing business conditions, or risk. For example, NPV might be suitable for measuring the impact of the Sept. 11 terrorist attack--such as the suspension or slowing of transportation.

Of course, because these alternatives are less concrete than ROI, there is a danger that they can obscure a project assessment. They are not a good replacement for ROI when evaluating projects that produce clearly quantifiable results over months as opposed to years. Here are some guidelines on how to conduct a proper ROI analysis so that it is a useful exercise for your company:

• Begin with clearly defined goals for e-business projects. Without a clear set of goals, you won't know what technology you'll need, what business processes may need to be changed, what costs to expect, or what metrics to use.

• Make sure that ROI analysis is performed objectively by using outside staff or by ensuring that the CFO's office will carefully audit the project plan and implementation.

• Establish a sponsor for the e-business project who leads the ROI analysis and is accountable for the ROI performance. This is important for projects that span multiple departments.

• Choose the right metrics and make sure they accurately describe the business case. If the goal is reduced inventory levels, make sure you have data on historical inventory levels and that you will be able to track inventory data throughout the project.

• Measure actual performance against the plan. It's amazing how many companies fail to collect metrics at the project's end or use different metrics for the plan and the completed project.

• Don't use ROI analysis for projects aimed at intangible benefits or broad or necessary strategic initiatives.

Above all, don't be hypnotized by the ROI mantra. Keeping a clear head about when and how to conduct an ROI analysis will ensure that your company spends wisely.

How does your company measure an e-business project's ROI? E-mail Adrian or Talk Back below.