Given the very uncertain state of the economy and the spending constraints under which every corporation is operating, CIOs are looking for new ways to defend their IT projects.
But deciding which projects to shelve and which to move ahead on is tough. In the past, such calls were highly subjective: There was little hard data to show how a project would affect the bottom line. Senior management might demand an analysis of return on investment, but even that is frequently a best-guess estimate, based as much on promises from vendors as on objectively derived numbers. The result: More large-scale initiatives keep coming in over budget, past deadline and without adding any clear and measurable value to the company.
But what if CIOs thought more like investment managers, who spend every day of their working lives using quantitative analysis to manage the value of potential investments? This whiteboard presents a way to determine the value of an IT investment to a company's bottom line in terms of its likely addition to the company's share price. It is based on the concept of discounted cash flow-the present value of the money the new system will bring in over the course of its life. The authors, Christopher Gardner, formerly head of PricewaterhouseCoopers' IT strategy group, and Ray Trotta, a former financial services consultant at KPMG-and now cofounders of iValue-developed this methodology as part of an overall effort to construct an objective basis for making IT investment decisions, selecting the most valuable investments and managing projects.
The goal of this whiteboard is not to turn CIOs into CFOs, but to acquaint them with the kind of thinking that executive teams are increasingly using to determine what their companies should invest in. To that end, this whiteboard is designed to provide a guide to the logic behind quantitatively valuing IT projects, rather than a step-by-step guide to evaluating your own projects. There is no guarantee that any project you analyze will throw off the benefits you've calculated. Indeed, the process of calculating the benefits and the cost of any particular project go beyond what can be described in this whiteboard (For more information on calculating the benefits for the case study presented in the whiteboard,
The whiteboard comprises four PDF pages that can be printed out on standard 8.5" X 11" paper.
Christopher Gardner is a partner and cofounder of iValue, an IT strategy firm based in New York, and the author of The Valuation of Information Technology: A Guide for Strategy Development, Valuation and Financial Planning (John Wiley & Sons, 2000). Ray Trotta, a partner and cofounder of iValue, teaches, speaks and consults on technology and finance topics. He is also a member of the graduate school faculty of the Walter E. Heller College of Business Administration at Roosevelt University.
This article was originally published on 11-21-2002