MEASURING THE
BENEFITS OF IT INVESTMENTS
Consider both hard and soft costs when evaluating
IT investment
A Gartner survey of attendees at its April 2005 Application Development
Integration and Web Services Summit found that while business units
play a big part in setting the agenda for IT in the organization,
more than half of the respondents felt that senior leadership in
their organizations did not fully understand IT issues.
So how can IT professionals help business executives better understand
the importance of IT investments when the process of measuring them
can sometimes be difficult to quantify?
What Measurements Reveal True Business Value?
Or perhaps a better question to ask is what should be measured
to prove the value of IT investments? A clear understanding of the
power of both hard and soft cost justification arguments may help
IT professionals to better present priorities and budgets to the
other members of the executive team.
The seemingly direct hard numbers provided through “total
cost of ownership” calculations have gained widespread acceptance.
Yet further examination often reveals that “total cost”
can be hard to define.
“Total cost of ownership (TCO) and business value are separate,
and that can be deceptive” said Gary Matula, Molex, CIO and
vice president of information systems. “TCO is the cost of
building and running a system. The business value is the other side
of equation: what value will you get from the investment. That is
more important. That value can include anything from a reduced cost
of running the business to shorter processing times.”
Molex, the Lisle, IL-based manufacturer of more than 100,000 kinds
of electronic, electrical and fiber-optic connectors and switches,
utilizes a strict governance process to align IT investments with
organizational goals. This is a vetting process conducted by a series
of steering committees in order to cost-justify and approve significant
IT projects.
Governance Process Helps Set Pace for Cost Justification
To go before the committee, all business-related IT project requests
at Molex must have a business sponsor. These business sponsors,
who can range from a manager to a division leader, are responsible
for clearly defining the business impact that a specific IT project
request will have on the company and the steering committees ensure
that approved projects accomplish their intended goals. Each of
Molex’s five IT steering committees is comprised of a variety
of divisional and functional representatives, spanning IT administrative,
human resources, marketing, sales and international operations.
“In the past we saw proposals that weren’t clear, that
were executed for the wrong reasons or they were written on the
back of a napkin,” said Matula. “Now we force all project
requests through our steering committees. This governance process
forces prioritization and alignment with the business goals.”
Molex even attaches the success of the project to the sponsor’s
positional goals. “If the project is important, the sponsor
and the steering committee define the metrics they want to track
– these metrics are not necessarily tied to dollars.”
Brad Hansen, COO and vice president of Fixed Operations for NSight
Telservices located in Green Bay, Wisconsin, agrees. As an example,
he cites a simple infrastructure improvement, such as the migration
from stand alone calendars to groupware.
NSight, a telecom, is built on IT. “We are unique in that
way because we’re providing IT services to ourselves and to
our customers.” For that reason, Hansen continually invests
in IT as part of growing the business. “Our budgetary process
lets us determine the needs of the business and doesn’t require
us to go to the executive committee for approval. There can be revenue
opportunities, as well, that impact our customers. These involve
customer counts, Internet uploads, and related factors,” said
Hansen.
“IT investments often impact the entire organization. If
your review process doesn’t consider all aspects of your company,
you will likely overlook something that could have a positive or
negative impact on the organization,” said Hansen.
“Individual problems, such as delays in Internet access,
can be symptomatic of larger scale problems,” said Hansen.
“Voice over Internet Protocol and other integrated communication
solutions can lead to increased bandwidth requirements.”
Hansen also believes another problem with “tangible arguments”
is that they are difficult to use for new technology investments.
The science and the art of cost justifying IT investments is properly
combining the hard and soft arguments into compelling arguments
that anticipate the hard dollar savings, disaster avoidance, and
strategic business benefits.
Disaster Avoidance: Selling Fear Not a Good Option
Attempts to cost justify the value of information security often
fail because security managers try to sell using fear or apply “one
size fits all” formulas that fail to take into account the
size of their business. These simplistic formulas also fail because
they are based on faulty assumptions about the likelihood of security
threats, says Tom Scholtz, vice president with the Security and
Risk Strategies advisory service of IT consultancy Meta Group.
Since network security investment decisions often are weighted
more toward the intangible or “insurance-like” benefits,
Hansen feels that organizations will do well to reflect on past,
related investments, because the value of these historical investments
can often be quickly measured and provide useful perspective.
Rather than looking for an ROI ‘silver bullet,’ security
managers should first estimate the business value of the assets
they wish to protect, then calculate both the tangible and intangible
costs of security breaches as well as the business benefit of keeping
data secure. To do this, values are assigned to an organization’s
information assets.
Intellectual property and the systems that enable it are a company’s
most important asset; and, therefore, the easiest type of information
to assign a value, according to IT consultancy Meta Group. What
is the value of these assets? The easiest way to quantify the value
of these assets is to estimate the “hard dollar” cost
or loss if a system were to fail for a given period of time. For
a retailer or a financial services environment, a hard dollar loss
could equal millions of dollars in lost sales. Add additional cost
such as the labor cost required to bring systems operational, overtime
for CSRs because of frustrated customers, and the numbers add up
quickly. It is also important to estimate the intangible –
but very real – effects of these security breaches on corporate
image, customer satisfaction, and employee morale.
“When we come across projects that involve mitigating risks,
we go through a process to examine costs involved with security
breaches, risk costs, and what type of investment is worthwhile
to address that potential risk,” said Hansen. “This
may include obligations driven by compliance issues like Sarbanes-Oxley.
But the bottom line question that usually needs to be answered is,
‘What is our exposure?’ That examination process helps
explain how much of an investment is required.”
The examination process demands that realistic values for intangible
costs be defined. Instead of claiming unrealistic values for these
intangible costs, IT should work with the executive team to “ballpark”
the intangible cost of these events. Security managers can estimate
the costs of restoring systems and data compromised by security
breaches. These metrics may be harder to capture than lost production
or sales per minute, but can be estimated with accuracy by looking
at examples of other companies that have suffered such outages.
PUTTING IT ALL TOGETHER
Experts at The Wharton School at the University of Pennsylvania
have studied information technology ROI and believe intangible benefits
are critical to any ROI discussion. Important intangibles include
strategic fit in the company, opportunity costs, levels of innovation
required, the value of connecting (or better connections) with customers,
and finally, the possibility of improved competitive position.
Wharton’s experts suggest employing one or more of these
techniques to account for both intangible and tangible value:
Business value index: This scorecard, which is completed after
a financial benefit analysis of tangible benefits has been conducted,
helps managers address subjective issues. The result is a tool executives
can use to gauge one investment against another over time. Intel
is known to have used this method for quantifying the business value
of IT investments, which sees managers assign values between one
and four to intangible benefits on a scorecard.
Scenario planning: This method is helpful when addressing investments
that may not show immediate financial returns. Scenario planning
lays out a variety of paths that can occur if the investment is
made -- or if it is not made -- and pushes decision-makers to define
the likelihood for each scenario and make decisions accordingly.
Real option theory: The theory defines technology investments as
"options" to be pursued. As opportunities present themselves,
managers can make small investments on a variety of IT projects
and see how they play out. As one becomes more likely to yield gains,
the investment strategy becomes clearer. Both real option theory
and scenario planning are fertile ground for business researchers
and can be highly esoteric. Plenty of consultants stand ready to
advise how to apply these concepts.
"R&D Council": Managers bring the more innovative
IT proposals to an R&D council for evaluation. The R&D Council
is supported by small percentage of the organization’s overall
IT budget.
Both Matula and Hansen have adapted pieces from each of these models
and use them in their steering committees.
Each of these methods allows a methodical and systematic approach
to calculating the total investment in an organization’s IT
assets. The gap between IT investments and the revenue mechanism
is substantial. Still, great revenue distance does not disqualify
an investment. It may demand subjective analysis.
Eventually, business culture also becomes a big factor. A CFO that
demands all IT investments be justified with hard numbers will get
what he wants.
A clearly defined process for tracking and measuring these investments
will speed decision-making and enable clear communication of IT
needs within the enterprise.
reprinted with permission of CDW and www.biztechmagazine.com
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