Mayor Т. A BUYER'S GUIDE TO IT VALUE METHODOLOGIES

Резник Елена Сергеевна

факультет экономики
кафедра экономики предприятия
специальность: экономика предприятия

тема магистерской работы:
Оценка экономической эффективности инвестирования информационных технологий
научный руководитель: к.э.н., доцент Кравченко Сергей Иванович

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A BUYER'S GUIDE TO IT VALUE METHODOLOGIES

Автор: Mayor Т.

Интренет-источник: http://www.cio.com/article/31209/A_Guide_to_IT_Value_Methodologies

When a company buys a new fleet of delivery trucks, it can predict with reasonable accuracy how much more revenue it will generate by delivering more goods more quickly to more customers. That can make it easier to justify the investment. It's rare, however, to find a CIO who can produce similar numbers for IT investments.
One way to make the value of IT more obvious is to adopt a logical, repeatable framework a valuation methodology. This framework helps identify and nurture those investments that ultimately contribute directly to the financial health of the organization. CIOs who have adopted these models say that they help establish a clear connection between IT and business strategy, link technology initiatives to shareholder value, facilitate negotiations with the CFO, and ultimately help them get more money for IT and spend it where it does the most good.
For sanity's sake, we've divided the major methodologies into three categories: traditional, qualitative (also called heuristic) and probabilistic. Some techniques, like Economic Value Added (EVA), are more akin to building blocks than methodologies. Others, like Balanced Scorecard, try to be full-blown performance-management systems that cover everything from goal setting to incentive compensation. Whatever methodology you choose, keep in mind that the overarching goal of valuation is simple to draw a direct line between IT investments and the enterprise's bottom line.

Traditional Financial Methods

These methodologies have their roots in the world of financial measurements, with IT-specific metrics and attempts at risk assessments.

Economic Value Added (EVA) "Net profit minus the rent."

As a metric, EVA equals net operating profit minus appropriate capital charges. If you're evaluating a new ERP system, for example, EVA requires that you factor in all investments, including initial cash outlays, maintenance, and internal and external training costs, and take those as a charge against anticipated benefits, which might be increased revenue or reduced costs.
Using EVA as a yardstick to assess the performance of individual departments, including IT, on a monthly, quarterly and yearly basis can help with decisions on new projects. Conflicting and confusing goals (like revenue growth, market share or cash flow) are replaced with a single financial measure for all activities. EVA is a good way to gauge the top-level impact of IT, but it's difficult for many IT organizations to connect that high-end view with something like the purchase of a new server without using intermediate measures. Other companies feel more comfortable using it as a single metric that plugs into another valuation methodology.

Total Cost of Ownership (TCO)

TCO is an efficiency measure best used for helping service-oriented departments like IT squeeze better price and performance ratios out of key business processes such as operations, disaster recovery, change management and tech support.
This approach supposesset out to calculate the ongoing costs of procuring, administration, setup, moves/adds/changes, tech support, maintenance, peer support, downtime and other hidden costs of owning a PC.
They do now. TCO has become a way of life for many technology managers who like its dispassionate analysis of new products and upgrades. Hardware manufacturers can increase sales by building TCO-reducing features into their products that reduce maintenance and support costs.
TCO does an excellent job of providing a current cost benchmark, and it works well for analyzing a narrow function or series of functions. When combined with best practices benchmarks, it can make a good framework for assessing and controlling IT spending. TCO does not assess risk or provide a way to align technology with strategic and competitive business goals.
Gartner is working on a broader version of the methodology called Total Value of Opportunity (TVO) that has a greater emphasis on investment performance.

Total Economic Impact (TEI)

Total Economic Impact is a decision-support methodology designed to accommodate risk and "flexibility" deferred or potential benefits often left out of straight cost-benefit analyses.
In analyzing expenditures, IT managers assess three key areas cost, benefit and flexibility and determine risk for each. Cost analysis takes a TCO-like approach in considering ongoing costs in addition to capital expenditures. This tends to be an internal IT measure. Benefit assessments look at the project's business value and strategic contribution outside of IT.
TEI calculates flexibility using a futures-options methodology, such as Real Options Valuation or the Black-Scholes model, both of which attempt to value options to be exercised later. For IT investments, risk considerations include the availability and stability of vendors, products, architecture, corporate culture, and size and timing of the project.
TEI works best when analyzing two distinct scenarios (build versus buy or Oracle Corp. versus Sybase Inc.), particularly when those two choices involve infrastructure or other enterprisewide projects whose benefits are notoriously hard to pin down. Some measurement experts, including Technology Decision Modeling's Don Hinds, aren't thrilled with the subjective, nonstatistical nature of TEI's risk-assessment component.

Rapid Economic Justification (REJ)

Like TEI, Rapid Economic Justification seeks to flesh out TCO by aligning IT expenditures with business priorities. The five-step process requires IT to: develop a business assessment road map identifying a project's key stakeholders, critical success factors and key performance indicators; work with stakeholders to identify how technology can influence success factors; perform a cost-benefit equation; profile potential risks representing probability and impact of each; and run standard financial metrics.
REJ is best suited for managing single projects rather than an entire project portfolio. Analysts and users like REJ's business assessment phase, its TCO-like baseline and its inclusion of risk analysis, although that analysis is subjective. If the winds are blowing fair from Redmond, you could get the whole valuation for free, as Aegis did. However, despite the "rapid" in its name, the REJ process can be slow. Also, some organizations won't trust any vendor-sponsored findings.

Qualitative Methods

These methods, sometimes called heuristic, attempt to round out quantitative measures with subjective and qualitative inputs to assess the value of people and processes.

Balanced Scorecard

The two were looking to join traditional finance lag indicators with operational metrics and integrate them into a broader framework that accounted for intangibles like corporate innovation, employee satisfaction or effectiveness of applications. The Scorecard puts those measures into four perspectives financial, customer satisfaction, internal processes, and growth and learning then asks managers to evaluate each perspective against the business strategy.
Because the Balanced Scorecard is primarily a tool for managing strategy, it rarely works without top-level executive sponsorship. If companies skip the initial step of mapping out a business strategy with clear cause-and-effect relationships, they can wind up measuring factors that don't link to business performance. Critics who don't care for the Scorecard's softer sliding-scale side charge it's used as a way to justify behavior rather than effect meaningful change. Even proponents acknowledge IT faces a special challenge in correctly mapping its activities to strategic corporate goals.

Information Economics (IE)

Information Economics aims to provide a neutral method of evaluating a portfolio of projects and allocating resources where they will be of greatest benefit. The idea is to force IT and business managers to articulate, agree on and rank priorities, and draw more objective conclusions about the strategic business worth of individual projects.
Both IT and business managers first list 10 decision factors and evaluate each for its relative importance (positive) or risk (negative) to the business. Each line of business has different decision factors that can be added, deleted or changed as priorities change. Next, IT projects are evaluated against those decision factors. The result is a total relative value number for each project in IT's portfolio. IE is a relatively fast way to prioritize spending and align IT projects with business goals. Its risk analysis is fairly detailed, if still subjective. This isn't designed to manage projects, and it won't unless IS and business managers are willing to participate and to possibly revamp current planning models to accommodate the process.

Portfolio Management

Portfolio Management was built around a premise that many other valuation approaches have since borrowed. To contribute to a company's bottom line, organizations must view IT staff and projects not as costs but as assets managed by the same criteria a fund manager would apply to any other investment. That means CIOs should continuously monitor existing investments and evaluate new investments by cost, benefit and risk. Just as stock managers diversify risk in a stock portfolio, so too should IT managers assess risk of technology projects and diversify accordingly.
Run-the-business investments are low risk, low yield. Growth is medium on both sides. And transforming the business tends to be a high-risk, high-yield activity. The level of risk associated with a component should determine the tightness with which it is managed. This is not to be undertaken lightly. If your organization isn't willing to undergo a change of management processes to accompany its new asset philosophy, Portfolio Management won't be as effective. It can also take time to get the proper mind-set ingrained in the organization.

IT Scorecard

The cause-and-effect linkages of the pure Balanced Scorecard don't work. Some of the [Balanced Scorecard] perspectives don't apply, for example, knowledge and growth. And pure Balanced Scorecard requires a strategy map, but IT organizations are for the most part tactical organizations whether they want to be or not.
For an antidote, he developed an IT-centric approach that emphasizes moving IT toward a strategic involvement. In place of the Scorecard's four perspectives, Bitterman substitutes business growth, productivity, quality (both internal and external to IT) and decision making. IT-centric, bottom-up philosophy, chances are you'll find stability in the program's highly specific, many-layered approach.

Probabilistic Methods

These methods use statistical and mathematical models to calibrate risk within a range of probabilities.

Real Options Valuation (ROV)

Taking its cue from the Nobel-prize-winning Black-Scholes model for valuing options, ROV aims to put a quantifiable value on flexibility. The technique was applied to leasing, mergers and acquisitions, and manufacturing. orks best as a stand-in for standard capital-budgeting processes in markets and economies where uncertainty is high and the need to stay flexible is at a premium. Most companies use ROV as a building block alongside more traditional financial and productivity measures.

Applied Information Economics (AIE)

Here's a method for people who mistrust TEI's sliding-scale "guesstimation" of risk analysis, feel uncomfortable with TCO's single-point outcomes, and wouldn't use a Balanced Scorecard to take a nap on. If you're looking for quantifiable, statistically valid risk-return analysis that would make an insurance executive drool, AIE should work.
AIE developer Douglas Hubbard combines options theory, modern portfolio theory, traditional accounting measures like NPV, ROI and IRR, and a raft of actuarial statistics to quantify uncertain outcomes and generate a bell curve of expected results that objectively incorporates both risk and return. This is the most numbers-heavy methodology covered here. Like the IT Scorecard, AIE is essentially a one-man show. Critics charge its myriad calculations eventually hit the law of diminishing returns. For costly and career-making projects, it's a thorough and statistically valid way to analyze risk.

Which One Is for You?

We've zeroed in on each plan as best we can, but it's simply not possible to make a statement like, Portfolio Management is best suited for Web-based pizza delivery businesses. Choosing a valuation plan has at least as much to do with the way you, your department and your organization operate as it does with the individual merits of each approach, practitioners say.
Take a good look at how other functions in your organization value their investments. You don't have to dummy your numbers down. It's time for IT to catch up with the business side.

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