June 24, 2013 Leave a comment
Most analyses of IT value consider the quantitative aspects of the IT investment as parameters for evaluation. The quantitative parameters like Capital and Operational cost, revenue increase etc. are strong indicators of the value of any investment. Using these parameters is a strong starting step towards understanding how valuable a particular IT investment is to the organization. However, relying solely on the quantitative benefits of an IT investment is an incomplete evaluation of the value. Quantitative benefits would only indicate the dollar worth of the investment. However, how valuable the particular investment is to the organization is dependent on other factors, which may enhance or even degrade the true value of an investment.
The IT Investment Value Tetrad, depicted above, extends the value of IT investments across four specific areas which affect a particular investment’s value to the organization. The four factors individually increase or decrease the value of an IT investment and their sum total is a very close approximation of the true value of the IT investment.
The IT Investment Tetrad defines the following four factors which contribute to the value of any investment:
Quantitative Benefits – The net financial savings or gains that can be easily quantified in monetary value. These benefits essentially include savings in costs or directly attributable increases in revenue of the organization.
Qualitative Benefits – Savings or benefits from the IT investment that are more difficult to quantify in financial terms, but are still significant to business goals, strategy or operations. These include benefits like Brand enhancement, organization and operational efficiency and knowledge capital enhancement.
Risk – The risks of implementing the solution, especially the managing of costs and the achievement of identified benefits. This includes risks of delays, adverse exigencies and risk of obsolescence. Value of the investment is inversely proportional to the magnitude of risk identified.
Stakeholder Reach – The number of stakeholders, both in terms of number and type, which are impacted, positively or negatively, by the IT Investment. For example, core network equipment, which would benefit the working of the entire branch office, is ordinarily rated higher that software procured for the exclusive use of a particular department.
The above mentioned factors, when evaluated objectively, present a true picture of the potential value that an IT investment brings to the organization. Also, as this evaluation does not rely on any one type of factor but rather represents all the factors, this type of value finds acceptance to all stakeholders.
The most important characteristic of this evaluation is that the single value arrived at the end of the analysis allows an objective comparison of different investment opportunities which may be of different types. A comparison based on the pure quantitative value would be possible only between investments of the same type. Using the IT Investment Value Tetrad, an objective comparison and prioritization of an investment opportunity to buy networking equipment can be done vis-à-vis an investment opportunity to buy software. Given the current economic scenario and the ever increasing need to classify and prioritize IT investments, the Tetrad based analysis is a powerful tool to ensure better business value.
Benefits across the table
As defined above, the IT Investment Value Tetrad can enable a rational decision making process based on the true value of any IT Investment. The specific benefits for both types of stakeholders helps the process of Business IT fitment within the organization.
Benefits for Top Management:
Enhanced measurability and valuation of IT Investments
Increased objectivity in evaluating IT Investments
Increased clarity on the strategic role of IT in the business
Compelling business justification for Investments to present to external stakeholders
Benefits for CIOs and IT Managers:
Stronger Business based valuation of Technology
Objective prioritization of IT investments in relation to Business goals
Stronger business case to justify investment requirement
Increased contribution to the Organization’s strategic goals