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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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Even in the simple case where the IT investment directly relates to a discrete business opportunity, the meaning of “the value of IT” isn’t exactly obvious. If you invest £100k in a computer, with its own staff and premises, to run a new Widget processing service that delivers £100k per annum profit, to come up with a “value of IT” you presumably have to subtract the value that that £100k investment could deliver simply by being invested in a safe security, discount the value of future money, subtract some value due to the increased business risks from being involved in widget processing - and decide just how much of the “value” apparently delivered by your new computer really comes from the business acumen of the staff using it anyway. [Caution: although I have worked for a Bureau of Transport Economics in a previous life, IANAE – I Am Not An Economist – so please don’t bother writing in to tell me this; unless you can provide a proper, and plausible, model for value delivery from operational IT services at the same time <g>]. If your new IT system shares resources with other systems and delivers value to a range of services/stakeholders, the problem of assessing the value it delivers is that much more complicated.

However, even a simple metric for value would be better than no metric at all. If I put a number on the value of IT to a service, stakeholders will form an opinion of whether my metric is placed too high, too low or about right. From that, we can eventually agree on a value metric – and if this not commensurate with the TCO of the technology involved, we can consider investing further (to exploit the value available from the service) or reducing costs (if value isn’t being delivered). But we must have a hard value metric (even if only one at the same level as Gartner’s simple TCO metric), which can be refined and improved; not just a soft opinion. And this implies some sort of automated algorithm, embedded in a tool; I just don’t see the average IT shop employing trained economists to undertake complex value assessments.

Personally, I suspect that the problem with routine “value of operational IT” metrics may be partly that, while TCO is a useful weapon in the vendor marketroid’s armoury, a “TVO” metric for value might be a two-edged sword. After all, it might show that upgrading to the next release of a technology with no extra functionality that you actually need doesn’t deliver any real value.

I remember when Microsoft started using TCO as a selling point for Microsoft Enterprise technologies, asking about the corresponding “value of ownership” for these technologies and being told that it was undoubtedly very high indeed – although Microsoft couldn’t actually put a figure on it. It was waiting for someone like Gartner to come up with a TVO model… Nevertheless, IBM Global Services can apparently offer to help IT executives “quantify and communicate the value of IT”, although some might feel it could have a vested interest here, and this doesn’t seem to involve a simple value metric corresponding to TCO anyway.

It seems strange to me that IT Governance initiatives (which encompass IT cost/benefit and value analysis) often seem to be driven by the vendor community as an opportunity to sell products rather than by the customer community that really needs them. [Perhaps ITIL is the honourable exception.] Some of the IT Governance products are very fine, no doubt; and some vendors almost altruistic, perhaps; but relying on this seems somewhat risky, from a business perspective. A Value of Ownership metric would be a useful weapon in the armoury of a customer – I wonder whether customers will eventually get together to sponsor a simple industry-wide TVO metric?

Photo of Simon Clark, Partner, Fidelity Ventures.

At the roundtable, Simon Clark, Partner at Fidelity Ventures (a Venture capitalist) provided an interesting sidelight on all this, since these days you can’t assess a company as an investment possibility purely on its real-estate, inventory, premises and investments etc. You need to value its “intellectual property”; and some of that is represented as metadata in repositories, program logic, configuration management databases etc – the value of IT again (although a lot of Intellectual Property will remain in people’s heads, at least until ice-skating in Hades becomes popular). And, again, there seems to be no straightforward value metric. The venture capitalists simply recruit retiring IT directors to help them make an assessment of whether the IT in a potential investment target is up to scratch – or even the major part of the investment opportunity.

Roundtable Roundup

There was considerable discussion at the roundtable around these and other points, but this rather confirmed the general view resulting from Managed Objects’ research: that people are happy with macro-level costing of IT, but that there is a demand for micro-level costing by service and department, which is being developed now; while usable value metrics, are both needed and some way off. Jim Knight summed up the situation neatly by saying that although we are close to delivering on service-based costing, we are just starting on service-based value. ®

David Norfolk is the author of IT Governance, published by Thorogood. More details here.

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