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12 August 2008

The value of belief

By Andrew Clifford

If you believe and act on business estimates of the value of IT, organisational pressures will drive the figures to be accurate.

In last week's newsletter I suggested that the most accurate way to estimate the business value of IT is simply to ask the business owner of each system what the system is worth, and believe and act on whatever answer they give.

We can use these estimates of value to help us manage IT. We can use them to decide which systems to keep, which to discard, and where to invest. We can use them to show which IT creates profit, and where IT is an unjustified cost. We can use them to value IT projects - the project value is the difference between the value of the IT before the project and the value of the IT after the project, multiplied by a suitable payback period.

Some would argue that this approach is an abdication of the IT organisation's responsibilities. I disagree. The IT organisation has broad responsibilities, but it can not be responsible for downstream business value. Openly stating this places the responsibility more clearly where it belongs.

Some would argue that this approach is too difficult. I disagree. In simple cases you can estimate the value of IT by estimating the cost of the manual alternative. In entirely IT-dependent processes you can estimate the value of the IT as a proportion of the value of the entire process. If the benefits of IT are intangible, you can set a notional value to counterbalance the very real costs of IT. Even estimating that an IT system is only worth its running costs is useful for management.

The beauty of this method is that it encourages business managers to estimate accurately.

  • If nobody agrees to own a system, or the owner refuses to value it, then the system has no identified value, and should be removed to save costs. The threat of removal should strengthen the IT organisation's position to get more meaningful estimates.
  • Some owners might say that they can not value the IT financially because its purpose is not financial, for example because it reduces risk or improves customer service. Do not be deterred. The same business managers estimate financial worth, for example when they take out insurance or employ staff to deal with these issues. It is their responsibility to translate between the financial and non-financial. If they will not, manage as if the system has no value.
  • Conversely, some owners might put ridiculously high values on their IT, or refuse to disentangle the value of IT from the value of the processes it supports. Excellent! The CIO or IT Director can claim this as profit that IT makes for the organisation. The personal and political ramifications of assigning profitability to another senior executive would soon bring down unreasonably high estimates.

Using the estimates to show how IT creates profit, and to show which IT systems are not worth their costs, encourages meaningful discussions about IT value. It encourages business managers to give the best answers they can: well-researched, cautious, but not too low. This is the best mindset for valuing anything, and gives the best figures for managing IT.

Next: Can I have it in Excel?

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