Pressure is high for CIOs and IT executives to deliver rock-solid IT strategies on smaller budgets. As a result, enterprises have an extremely low tolerance for project failure or spending that falls short of expectations. This sets the stage for a closer, more fruitful, relationship with vendors in helping companies reduce the risks and maximize the rewards from every IT investment.

One way to bring about this relationship is to use the service level agreement (SLA) - long valued as a tool for guaranteeing that technical competence is being delivered such as availability and responsiveness - instead as a way to ensure that a return on investment (ROI) is achieved. Under the ROI lifecycle model, vendors partner with their customers pre-sale to quantify the cost / benefit goals of the project, and to ensure ROI is realized post deployment.

Taking the ROI lifecycle concept one step further, as with other SLAs, vendors tie their financial compensation to the achievement of key benefits.

How could this work in practice? Let's say a company buys CRM software and establishes a minimum expected ROI from the software. If the minimum benefits aren't realized, the vendor has an opportunity to help remedy the situation. If the vendor still fails to deliver, financial penalties could apply in the form of a rebate or additional services to help drive promised benefits. On the flip side, if the system delivers a higher ROI than expected, the IT vendor gets a financial reward (or less-tangible rewards such as public testimonials or future contract extensions.)

This may be radical thinking. But when two-thirds of IT projects run over-budget or over-schedule and one-third are cancelled completely - and even when a project is successfully deployed, more than 50 percent currently fail to deliver on ROI expectations - for CIOs, offloading some of the project risk to the vendor is worth a second look. Besides, vendors should have a more vested interest in making sure their products actually deliver not only promised technical competence, but intended business value.

The ROI SLA can be mutually beneficial to vendors, IT departments and business units alike. Success requires close collaboration between vendors and the IT department at every step of the way: planning, implementing and managing the system. In the process, CIOs can be confident that IT projects will be less risky and will deliver tangible gains. Perhaps they'll even have easier approval cycles with the CFO, CEO and board of directors? Developing an SLA up-front ensures that all stakeholders understand the proposed costs, benefits and ROI, and commit to their accuracy.

In the case where a project veers off-course, the vendor and the enterprise are already tracking costs and benefits, and are alerted to step in for quick remediation if in the beginning costs surpass expectations, or adoption or benefits fall short of projections.

From the IT vendor's perspective, implementing the ROI SLA is a difficult proposition because it creates delays in revenue recognition or uncertainty as the vendor relies on the customer to successfully implement, adopt and use the system; and there's always the potential for higher expenses such as additional integration, training or services costs the vendor might need to bring to bear to help the customer meet the SLA goals. On the other hand, the SLA could greatly decrease the sales cycle by reducing doubts a company may have about implementing the solution. And, if the project exceeds expectations, the vendor can significantly increase revenue through gain sharing programs.

Difficulty in Reaching the Altar
The building blocks already exist. Many vendors are trying to help users calculate the return on IT investments via ROI spreadsheets, sales tools and even business value consulting services. And SLAs experiences are proven in technical areas such as networking and outsourcing / managed services contracts.

Agreeing on where to set the benchmark for expected returns may seem to pose one of the greatest risks for ROI SLA negotiation break-down. Arguably, vendors would push for a modest level of returns, and the buyer will demand higher results. In reality, vendors' business cases must be realistic and achievable, customized to a company's unique environment and business goals - and, of course - compelling enough that the sale is approved. For an added level of reassurance that the ROI benchmark is accurately set, have the business case validated by a neutral third party.

In recent research by IDC | Alinean, more than 80 percent of CIOs demand business value justification for planned projects over $50,000, and demand for ROI justification continues to grow. However, Computerworld surveys revealed that ROI commitment and the depth of competence remains weak in most IT organizations. More than 65 percent of buyers indicate that they do not have the knowledge or tools needed to do ROI and business value calculations, 75 percent have no formal processes or budgets in place for measuring the value of IT projects and 68 percent do not measure ROI and value derivation on IT projects 6 months after the work is completed.

Clearly, ROI cannot be left to buyers alone, as they often lack the resources or tools to easily quantify value, can slow the sales cycle by taking months to perform the justification or gain approval consensus, and will have difficulty seeing the differentiating value of your solutions vs. competition. Moreover, do not have the tools to measure success for follow-on projects, meaning they will not be able to assess the success or value that you delivered.

Buyers recognize these issues as well, and currently rely heavily on vendor justification; 81 percent expect IT vendors to quantify business value of proposed solutions, according to Ernst and Young, and 61 percent rate a vendor's value assessment ability as important in the selection process, according to a recent CIO Insight survey.

The Three Steps to Tying the Knot
So how can vendors and buyers close the current gap? Meeting to marriage does not happen overnight, so the following three steps are recommended:

Courtship: The successful vendor can use ROI analysis and tools in the pre-sales process to help value current opportunities for improvement, quantify benefits and costs, and calculate potential ROI scenarios. Used in an open, collaborative and consultative basis, the vendor can be more attractive by using ROI to elevate the relationship with the prospect, from a suitor with a motive to one seeking partnership and value-add.

With customers' ROI demand, many vendors have implemented some form of ROI analysis, but mostly ad-hoc spreadsheets developed by an internal ROI advocate with little to no standards, third-party validation, maintenance, tracking or training. It is important to take the ROI efforts to the next level with best practices such as enterprise-wide ROI software which can empower later engagements such as collecting analyses centrally and analyzing not only costs and benefits, but quantify potential resource and key performance indicators (KPIs).

Validation: With the stage set, the vendor has collaborated to quantify all costs, benefits and key performance indicators of success. Can the vendor live up to the promises? The proof is in the pudding as the vendor and customer implement ROI lifecycle management to measure costs during implementation and benefits post-deployment, proving that promises were kept.

Commitment: The vendor and customer commit to the relationship with a shared risk-reward SLA where higher than expected outcomes are met with additional rewards, and rough times are met with shared consequences and a commitment to persevere towards achieving the stated goals.

Given how dramatically IT spending practices have changed over the past four years and the level of fiscal scrutiny on investments, now is the time to move toward shared risk and reward in major technology projects. While today's status quo is the comfortable choice, vendors who are early adopters of ROI SLAs will take the lead in finding true partnership with their clients.

This will serve to quickly change the way products are sold - from traditional feature-function pitches to business value selling where vendors work with clients to quantify all projects costs and benefits pre-sale, assure that KPIs are being met during implementation and deployment, and that benefits are translated into bottom-line impact. For the CIO, it's all about mitigating risk and increasing the likelihood of rewards. For vendors, think about opportunities to use quantifiable business impact for success-based revenue kickers as the basis for up-selling and cross-selling with the customer, and for marketing cross-references to other accounts.

Tom Pisello is the founder and CEO of Orlando, Fla.-based Alinean, an ROI consultancy and software provider focusing on the business value of IT investments. He can be reached at tpisello@alinean.com. -