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IT: – Still the Black Hole of the Balance Sheet?

Measuring the cost of IT ownership could be misleading unless you can also measure the value being delivered.

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IT: – Still the Black Hole of the Balance Sheet?” was the title of an interesting media roundtable organised by Managed Objects.

Photo showing attendants at the Managed Objects IT: Still the black hole in the balance sheet? roundtable.

It discussed measuring the cost/benefit of IT in the business, although a research survey (of almost 300 IT and business managers) commissioned by Managed Objects as a basis for the discussion, appeared to concentrate mostly on the cost side of the equation and the granularity with which costs could be measured.

Photo of Jim White, Business Technologist at Managed Objects.

Jim White, Business Technologist at Managed Objects, summarised its research findings as saying that just over half of the IT managers surveyed were happy with the way that IT controlled costs - but a similar proportion of business managers felt that cost control by IT was only “somewhat effective”. Since the business pays IT salaries, “could do better” is a worrying rating.

The survey also indicated some concern with the granularity of IT costings and a need to cost individual IT services, not just measure the overall cost of technology.

But, does the measured “cost” of an IT service have any real meaning, except in relation to a measured “value” delivered by the IT service?

The first UK application I was involved with enabled a Bank to run its back office centrally in London, instead of computerising and integrating semi-automated back offices throughout Europe. The value delivered by this at the time was pretty obvious at the macro level – and it rendered the cost of the mainframe involved almost irrelevant. On the other hand, few dotcom initiatives in the 1990s made any money, so subsidising them heavily from parts of the business that actually made a profit made no sense - unless the predicted value of these dotcom systems could be measured and monitored; and costs kept in line with the business value from the dotcom services when (or if) it was delivered.

Value of IT

The “value of IT” is something that should concern all of us as developers – because if our paymasters can’t easily measure the value delivered by the IT systems or services we develop, they may well underestimate it (nearly half of the respondents to the Managed Objects survey thought that their companies would spend too little on IT in 2006). The hard costs of IT seem obvious to the people signing the cheques and will tend to weigh heavier in the balance than any nebulous value delivered, when boardroom discussions turn to cost-cutting and outsourcing.

On the other hand, IT must have a value, even today when the “low hanging fruit” (like the bank back office) have mostly been plucked, since the easiest way of reducing the cost of IT to zero is to stop using it; and I don’t see many organisations replacing serried rows of PCs with serried rows of clerks… It is just hard to put a unarguable monetary figure on IT’s value to the organisation, although most of us accept that, after a certain point, cutting costs can reduce the value delivered to nothing. .

Photo of Will Cappelli, Research VP at Gartner.

Back at the roundtable, Will Cappelli, Research VP at Gartner, thought that IT executives, at least, usually appreciated the problems of costing IT; but that allocating costs to individual services was non-trivial, even now.

However, when I asked him why Gartner, following on from its success with its somewhat simplistic but apparently useful TCO (Total Cost of Ownership) models hadn’t followed up with a Total Value of Ownership (TVO) model, he was less than reassuring. Apparently, the problem is too hard and, although there are value models which could be used, they are academically controversial and complicated to use. “We know,” he said, “where value is [qualitatively] but not what it is [quantitatively]….”

[Nevertheless, Gartner research does work on the general business value of IT, see here, for example; and even has a “Total Value of Opportunity” methodology, although this seems to be more to do with investment planning than with the value being delivered by operational systems. Forrester has something similar, in its Total Economic Impact (TEI) framework, originally from the Giga Information Group. Neither Gartner’s TVO nor Forrester’s TEI seem to feature as much as TCO in IT investment discussions today, although you will see them quoted on occasion and they do bring value into the discussion]

Cappelli did suggest that Real Options Pricing might be our best bet for assessing the hard value delivered by IT but didn’t go into the details of this. An academic paper making “A case for using real options pricing analysis to evaluate information technology project investments” (Information Systems Research, Vol. 10, No. 1, pp. 70-86, 1999), which you can find here, will give readers some idea of what we’re talking about, but it certainly ain’t easy going, and seems to relate more to predicting the future value of investment than to monitoring the value actually being delivered by operational systems.

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