UK: UNTANGLING THE INTANGIBLES - INFORMATION TECHNOLOGY. - Twenty years ago, general management's interest in its IT investments was largely confined to whether they were on time and to budget. In those days IT projects used to be justified almost entire

by Malcolm Wheatley is a consultant and writer.
Last Updated: 31 Aug 2010

Twenty years ago, general management's interest in its IT investments was largely confined to whether they were on time and to budget. In those days IT projects used to be justified almost entirely on the basis of cost savings, and were submitted for board approval - along with their ROI or payback period - just like any other item of capital expenditure. How times have changed. Few managers now need to be reminded of the inadequacy of such criteria. Computer technology has moved beyond the mere cutting of costs.

The very least it must offer these days is commercial functionality. It might even promise that much sought-after commodity - competitive advantage. Yet try working 'possible competitive advantage' or 'improved customer service' into a payback calculation. You can't. On the other hand it is wrong simply to leave them out altogether.

The authors of How to Assess your IT Investment quote Robert Kaplan's observation that by ignoring intangible benefits - or assigning a zero value to them - accountants choose to be precisely wrong rather than vaguely right. The authors analyse a number of real-life IT investments to discover just how significant (and unexpected) the intangible benefits turned out to be. On occasion, the 'hard' benefits failed to materialise at all. On the other hand the 'soft' ones were sometimes bigger and better than anticipated. In one of the case studies which they cite, management chose to justify its IT system on the grounds of hard benefits, because it was simpler to do this than to go on arguing interminably about the soft ones - even though it was for the soft ones that the investment had been made.

The book divides IT projects into eight categories, according to their position on a 'ladder' representing levels of benefit and risk. On the bottom rung are 'mandatory changes', as when a bank installs Automated Teller Machines (ATMs) in order to match the competition, and because customers want them. The benefits are low. The bank is unlikely to win much new business as a result. But the risks are also low because the technology of ATMs holds few mysteries.

On the eighth rung are systems designed to achieve - or facilitate - the transformation of entire businesses. A good example, dating from the mid-'80s, was General Motors' billion-dollar spending spree intended to counter Japanese encroachment on the US market. The potential benefits in this instance were enormous. But so were the risks, as GM found when forced to recognise that IT alone could not hold back the tide of imports. On the intermediate rungs are projects of more moderate risk and benefit - such as large-scale management information systems.

The evaluation method to employ in any given situation, the authors sensibly suggest, depends on the type of project under consideration, also on the nature of the organisation itself. Two chapters under the evaluation heading are devoted to a review of the possible techniques, as found in the literature. The first of these chapters looks at the range of quantitative approaches: from basic cost/revenue and ROI calculations through to more sophisticated cost/benefit analyses. The second deals with experimental techniques: multi-objective, multi-criteria methods, value analysis plus a variety of less formal approaches.

Each of the techniques is described in detail, and its advantages and disadvantages are listed. At the end of the section, the contents of both chapters are summarised in a useful table which scores each approach on factors such as the level of detail and the data required. Once the available techniques are understood, and the type of IT project has been identified in terms of its position on the risk and benefits ladder, the authors propose a grid approach for matching the two. This allows the organisation to plug in further information about itself and its preferences.

The authors have produced a thorough - and, in places, thought-provoking - book. Anyone who turns to these pages genuinely seeking guidance on how to assess IT investments will find their effort rewarded.

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