How Do I Measure the Value of IT?

1. How Do I Measure the Value of IT? Chapter 2 MISY 300

2. Financial & Non-Financial Measures of IT Value of IT • Value: must be measured objectively, yet may require subjective judgments Grady’s Definition of Value

3. Why is it Important to Measure IT Value? • IT consumes significant resources relative to other functions • Cost to operate and manage the IT infrastructure • Ubiquity of IT in firms today • How does IT help the business bear the cost to achieve its financial performance targets and business objectives? • Must deliver value in economic terms that make business sense • Value arises from the impact of IT on business processes

4. IT Expenditures as a Percentage of Revenue • Insufficient to determine whether industries are getting value from IT Providers • 1.7% (oil and gas production) – 7% (financial services and banks) • More in Chapter 4

5. Measures of IT Value • “…the right IT metrics are neither the same nor relevant for every organization.” (Lutchen, 2004) • Relevant • Practical • Actionable • Reported or Communicated • Owned

6. Financial Measures of Value • Total Cost of Ownership (TCO): tracks costs from the time than the firm buys an “IT asset” until that asset reaches the end of its useful life. Future costs are hard to predict, but this is a good way to compare alternatives • Return on Investment (ROI): quantifies how firm realizes business value for its costs. ROI expresses the value of hard costs better than it conveys the impact of intangible savings • Economic Value Added (EVA): works like ROI but is based on opportunity costs instead of the internal rate of return • Real Options Valuation (ROV): calculates an IT project’s value by weighing its ongoing and future fiscal impact. Helpful in evaluating choices involved in start-up projects • Return on Assets (ROA): net income an IT project generates divided by the total cost of the assets it used to earn that income • Return on Infrastructure Employed (ROIE): works like ROA, but bases its ratio on the cost of IT services instead of IT assets

7. Non Financial Measures of Value • Multi-criteria approaches • Strategy framework approaches • Portfolio management approaches • Other value considerations

8. Multi-criteria Approaches • Information Economics • Applied Information Economics • Total Economic Impact • Total Value of Opportunity

9. Strategy Framework Approaches • Balanced Scorecard • IT Scorecard

10. Portfolio Management Approaches • Group portfolio framework (McFarlan’s Grid) • Ross and Beath Investment quadrants • ISR portfolio pyramid

11. Using IT Value Measurements in Decision Making • IT value measurements are only useful and worth making if they are used to guide decisions • Different decision makers require different information and different levels of detail of the same information

12. Dashboards • Tool used to present measurement information to managers at different levels • On-screen presentation of trend charts, showing 4-10 most important measurements for the viewing decision maker. • Drill down capability • IT value only one of several measurements displayed

13. The Business Case • Management tool that applies internally valid measures of value to new investments • Includes quantification of the project to the business • Tangible and intangible benefits • What if benefits are all intangible and not easily measurable? • Good for new and legacy systems? • Do we really need a business case for every project when may are really small?

14. Value Visualization Framework • Any project must deliver value and value must be visible • Holistic view of the firm • Facilitates selection of best practices

15. Value Visualization Framework - Visualize

16. Value Visualization Framework - Improve

17. Value Visualization Framework - Operate

18. Value Visualization Framework - Measure