Like any other corporate investment, money should also be earmarked for IT based on expected returns to the business, experts say.
They also note that standard financial methods don’t help you accomplish that.
Many businesses use imperfect methods to gauge the value of their IT investments, suggests a white paper from Forrester Research Inc.
That’s because they rely on front-end estimates that don’t consider the full value of an IT project over its lifecycle, says the white paper titled ‘Measuring Business Value of IT.’
The paper was authored by Craig Symons, an analyst at the Cambridge, Mass.-based consulting firm.
Measurements such as ROI, he says, only produce a false sense of credibility by generating a number out of a formula applied to an IT project assessment.
Symons urges companies to take into account intangibles and incorporate risk for an accurate measurement.
And that’s no easy task.
“Trying to connect business value with IT investment is always challenging,” says Sebastien Ruest, vice-president of services with Toronto-based analyst firm IDC Canada.
To accomplish that ask: “What stage of adoption are you at with technology and where do you want to get?”
What do you do once you’ve answered that question?
Forrester’s advice is that you form a decision-making committee comprising senior managers from various business departments, who meet regularly to discuss investment options and to make decisions.
Once that’s formed, you can choose tried and tested strategies to measure the business value of your IT investments. These include:
1. Business Value Index
Business Value Index (BVI) offers a straight-forward, no-nonsense assessment of the value of IT investments, the white paper says.
The method was developed in 2001 by Intel Corp.’s IT organization, which then used it to assess the business case for a wireless local areas network (WLAN).
The Santa Clara, Calif.-based chip maker’s model also factored in softer benefits of such a deployment – such as increased staff flexibility that came from real-time access to information.
“It’s really about managing the IT budget and it is very technology centric,” Ruest explains. “It positions the performance of the organization against the technology investments they’ve made.”
BVI employs weighted criteria that measure softer considerations such as customer need, business and technical risks, strategic fit and revenue potential.
Based on these, it quantifies the innovation and learning generated.
The model’s strength is its ability to frame an IT project based on your enterprise needs, Ruest says. An important factor, since a bad fit will mean cost overruns and higher risk.
“Technology doesn’t happen in a vacuum,” the IDC Canada analyst says. “What is interesting with Intel is the technology is ubiquitous, so they have invented a model to measure that.”
The fact that it is developed in an environment where technology has high penetration is a strength of the model, Ruest says. It makes it a good model for an enterprise with huge technology investments (Intel’s IT budget is more than $1 billion annually).
But if IT isn’t deeply involved in all your company departments, another method may be called for.
BVI’s three scores of business value, IT efficiency and financial attractiveness, likely won’t give you a good benchmark, analysts say.
“It’s sort of a CPU mentality,” Ruest adds. “More power, more productivity, and trying to cram as much as you can into a small amount of space.”
2. Applied Information Economics
While BVI is easy to implement, the Applied Information Economics (AIE) method is thorough and specific.
This decade-old strategy uses complex mathematical models to quantify uncertainties in your business plan.
“It tries to factor in a lot of the intangibles,” IDC Canada’s Ruest says. “It takes into consideration all of the outliers, and from that perspective, it’s a little more scientific.”
The fact that it can be customized, and the details it offers make it a good model for multinational corporations. But they aren’t the only adopters.
The Environmental Protection Agency put AIE to work for many large projects, including a re-thinking of its desktop replacement policy.
The U.S. federal agency wanted to change its replacement-after-five-years-or-more policy to a three-year replacement policy, or four-years with immediate catch-up.
It sought to do this by introducing new desktops, according to Forrester.
The AIE model calculated the four-year with catch-up model was the best approach, due to increasing the productivity of thousands of staff.
The additional cost of the program was calculated as the increase in PC purchases, not the total purchases – an important factor in estimating the true value.
“It’s very thorough, but requires significant commitment from everyone to understand the impact of IT,” Ruest says.
That means organizations that don’t want to spend the time reading the book about this method will likely hire a consulting firm to manage this tool.
But it can quantify both uncertainty and risk.
For instance, a value like “customer satisfaction” that is normally ambiguous is expressed in definitions that can be measured, the white paper says.
Risk, too, is quantified and compared to the risk-over-return rate of non-IT investments that could be made.
3. Total Economic Impact
Forrester’s own method is touted as having the flexibility of Intel’s BVI and adding a risk quantifier.
Total Economic Impact (TEI) is the middle-of-the-road between the BVI and AIE models.
The IT consulting firm has found success with the model.
One U.S. university came to them after spending $120 million on technology over two years, but being unable to account for where the value was being generated.
After a review of the school’s project initiation process, they adopted TEI and the school’s CIO put a new project approval system in place, according to the white paper.
TEI incorporates intangibles by looking at only the changes to IT costs against maintaining the status quo.
It is normal to expect a higher cost during project development, and this is considered as the investment being made, according to Forrester.
Also taken into consideration is the business affected by training of non-IT staff, such as sales or marketing.
To incorporate risk into the model, the initial cost and benefits estimate are translated to a range of possible outcomes. This allows for a more realistic expected value to be generated.