Skip to main content

How do you value your potential IT investment ?

Decisions need data and analysis and the ability to make the right decisions, especially in resource intensive sectors like IT are posing an interesting challenge. The difference between a right decision and the wrong decision could run into thousands of dollars or more and added to that the net cost of the investment gone wrong in terms of business inefficiencies and business lost.

Some key questions which typically arise are
Value (including “intangible” benefits)? 
Risk Management
How do I know whether one IT investment is “better” than another (IT or otherwise)?     
How do I know when to stop analyzing, accept some risk, and make a decision?  
How do I know viability of approach ?        

Applied Information Economics (AIE) is the practical application of mathematical models and scientific measurements in order to optimize decisions in uncertain  investment environments.

In IT, measuring what matters most is key to driving quantification of information value. Typical forecasting models like Monte Carlo simulation, box and Jenkins and other models are used.

An article by hubbard research elucidates this point and the article also states that Contrary to   popular belief,  the value of information can be calculated as a dollar value. Although the term   “information” is often used in   an ambiguous manner, it can also be used as           an unambiguous unit of measure with a well-­‐defined value calculation.

This mathematical procedure can be paraphrased as follows:  
1. Information Reduces Uncertainty
2. Less Uncertainty Improves Decisions       
3. Better Decisions Result in More Effective Actions
4. Effective Actions Improve Profit

Other approaches using modern portfolio theory to also approach the set of potential IT investments as a portfolio and establish rates of return and risk boundaries and evaluated on a risk-return basis.
Traditional approaches of Cost Benefit analysis are also very popular and using NPV, ROI and EVA are comfortable approaches since finance teams understand them and are very conversant with them.

The trick to this approach is that for analysis, numbers are needed and most are subjective estimates in terms of value and are discrete in nature and not spread over a range, hence there are chances of perceptions taking over and skewing the analysis.

A better approach maybe the AIE approach using forecasting models and statistics.

So, are you valuating your data and IT investments ? I would be keen to hear from you.

Comments

Popular posts from this blog

Need Solutions Not Problems - Your Mantra For 2010

Happy new year 2010. The thought for today's blog came from my experience standing in a queue of a fairly respected retail chain. The queues were long and the number of check out counters were minimal as usual ;=) ( I think a lesson in queuing theory is warranted for all retail chain outlets I think ;=) ), anyways, the line moves on and suddenly stops .. I enquire and they say that there is a system problem, I nod my head and wait on, after some time its my turn at the check out counter and the sales clerk gets a phone call ( presumably from a friend as she was smiling and talking) while I the customer was waiting ... finally I got my good paid for and went up and met the store manager who was standing there and indicated as to why he did not open more counters ... he started moaning about the workers he had and about his manager and that nobody pays attention etc etc etc and I quickly exited from the store. That got me thinking how many of us encourage our teams to come to us with...

Acceptance

I have been wanting to pen my thoughts for a long time, more around sharing some perspective I have but more around sharing what I have learnt. Acceptance is key for success in life and also in corporate life. I have seen so many individuals fighting againts accepting what has been laid down and often causing harm to themselves mentally and physically. I am not saying lie down and accept what is being handed out but know when the cause you are fighting for is a lost cause or you are fighting against odds which have been stacked against you.  why not just embrace what is offered to you if you see that as a fair deal and let live ? Examples of acceptance at the workplace could be : your manager behaves in a rude manner and does not give you the respect you feel you deserve, just accept the fact that he/she is that way and make peace with yourself and look at the choices and options you have around this.  you could choose to move out if you plan that but if you do stay, do not grumble and...

Responsibility

Responsibility is something which is very much in the air ...look at the statements of President Elect Obama on auto companies CEO's to walk the talk and cut costs was a prime example of taking ownership and taking responsibility. I believe admitting your accountability and recognizing your influence and the role you play is key to being responsible. there are some individuals who are intent on making a difference like Navi Radjou from Harvard who writes about bridging the suitability of the workforce in india where he stresses that people are looking at eligibility enhancement (soft skills enhancement, technical skills enhancement) and not enough at suitability (aptitude, moral compass, values, ethics). He also talks about social entreprenuership as well. Some key individuals like Emmanuel Justus in the HR community have also been taking responsibility and questioning the task of preparedness of our workforce, do we as human resource professionals prepare individuals for failure...