MEASURING THE VALUE CONTRIBUTION UPFRONT
Measuring the value realizable out of an IT investment initiative is imperative. It makes the IT decision-making process a customer-focused, value-driven process. It shifts the perception of IT as cost center to IT as a value center. However, measuring this business value has never been an easy task.
A comprehensive business case preparation is key to managing an IT portfolio of investment and should assess the added value of capital initiatives by measuring costs (TCO), benefits, risks, and scalability. The business case should identify accountabilities supported by clear and relevant business metrics, and it should be a living operational management tool updated though the full life cycle of the project.
The objective of any investment initiative is to have a positive impact on business outcomes like revenue, operating expense, asset efficiency, and market share or customer satisfaction. Using the concept of “value dials” helps in IT value estimation.
WHAT IS BUSINESS VALUE?
It is the benefit represented in dollar terms for an organization’s business areas that is a result of information technology solutions or services as evidenced by the following:
- Direct contribution to the organization’s market position or revenue
- Deliverables and results that support solving customer (internal and external) needs or challenges
- Financially derived from customer (internal and external) cost savings or benefits
- Technology investments that advance the industry
The IT Value Management team uses this definition to inform IT project owners on how their project fits into our focus of measurement and makes sure that business owners agree and expect the “value-added benefits” within this definition be presented to them to evaluate any investment decision.
STANDARD METRICS VALUE DIALS
“Value dials” (derived from INTEL’s IT framework) help measure IT value. They are used to describe specific, observable, quantifiable elements of business goals. The major challenge in implementing a benefits realization process is: “How to model the flow from project activities through to the value?” The “results chain technique” developed by John Thorp (ref: Information Paradox) helps build road maps that help to understand and manage the complexity including linkage, reach, people, and time. Project initiators could use the “results chain technique” to arrive at categories of benefits initiative. Investments in different categories bring in varying levels of ROI, and a few may not bring in direct financial benefits at all (e.g., infrastructure category and information security category that improves agility and enables other initiatives to bring value).
Examples of “result value chain” to accommodate all categories of investments are used in the measurement methodology described here and can be referred in the link cited below.
Business value index (BVI) is a composite index of factors that impacts the value of an IT investment and is evaluated on these vectors:
- IT business value (impact to the organization’s business) is estimated using the “value dials” concept and its financial attractiveness of the investment, using internal rate of return (IRR), or payback period to estimate the same.
- Impact to “IT efficiency” [use factors IT agility, potential to reduce IT costs, and alignment to IT strategy].
This is preferred due to its simplicity, and it goes beyond using purely financial criteria to encompass business value and “IT efficiency.” Final figures are presented in a bubble chart form to rank competing projects.
These techniques were applied to a recent CCTV Camera & Attendance reporting application (see figure 2 and 3). The project sponsors learned that:
- The initiative falls under the types “Security,” “Office Productivity,” and “Compliance” domains.
- And benefit realization would be through “Head Count Reduction,” “Head Count Productivity,” and “Risk Avoidance” Value Dials.
Further quantifying these benefits, the team found that the project has a payback period of three years with 39 percent as IRR (internal rate of return) resulting in a favorable BVI (business value index) of Improved Business Value with no or limited IT efficiency penalty.