Justifying Investments


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A case for using objective criteria to select investment proposals.

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Justifying Investments

  1. 1. Justifying Technology Investments<br />Using Governance Practices to Ensure Valid Decisions<br />Copyright 2009 Esposito Consulting Group<br />
  2. 2. Objective<br />Effective Governance Practices will allow you to:<br />Build more accurate and credible business cases<br />Incorporate benefits, costs, flexibility and risk factors into your business cases<br />Understand the most important financial concepts: return on investment (ROI), net present value (NPV), internal rate of return (IRR), and payback period<br />Prioritize and select projects based on their financial projections<br />Copyright 2009 Esposito Consulting Group<br />
  3. 3. A poor track record has contributed to management skepticism of technology investments <br />A recent KPMG study found more than half of surveyed companies admitted to failed IT projects costing each company an average of $12 million in the prior year <br />98% of companies with mature project/program justification processes reported 0% failure rate<br />A recent Morgan Stanley study estimated that US companies spent $130 billion on failed IT projects in the prior two years2<br />Copyright 2009 Esposito Consulting Group<br />
  4. 4. IT budgets and successful project delivery<br />Maintenance & operations<br />75%<br />Successful projects<br />New projects<br />1/3<br />25%<br />Potential failures<br />2/3<br />Copyright 2009 Esposito Consulting Group<br />
  5. 5. IT business case justifications<br />A justification process provides transparency into the value of technology investments<br />A consistent, repeatable justification process will:<br />Clarify how the organization will use its resources to accomplish a particular goal<br />Identify not only the costs but also the benefits and risks associated with the investment<br />Provide a consistent method for prioritizing and selecting projects<br />Ensure tracking of metrics to measure costs, benefits realization, and customer satisfaction<br />Copyright 2009 Esposito Consulting Group<br />
  6. 6. Business cases are a proven way to justify technology investments<br />The business case approach:<br />Aligns technology investments with business goals and objectives <br />Provides a consistent ROI methodology across all projects over time<br />Establishes a uniform, meaningful dialog between IT and the business, in terms the business understands<br />Defines metrics that business stakeholders have agreed to, helping to ensure benefit realization and accountability<br />Identifies risks and risk mitigation strategies<br />Ensures that strategic flexibility options are considered and valued<br />Copyright 2009 Esposito Consulting Group<br />
  7. 7. VAL IT is a proven, consistent, & effective methodology<br />Provides the techniques and tools to quantify, justify, and value investments<br />Aligns project goals with business goals and assigns accountability<br />Supports decisions with a business case<br />Takes into account risk and flexibility options<br />Facilitates “what if” scenarios <br />Assigns clear accountability<br />Allows one to view all decisions as a portfolio of investments<br />Copyright 2009 Esposito Consulting Group<br />
  8. 8. All projects are subject to risk<br /><ul><li>Project size and scope
  9. 9. Technology risk
  10. 10. Vendor risk
  11. 11. Education risk
  12. 12. Cultural/behavioral risk
  13. 13. Training risk
  14. 14. Organizational risk
  15. 15. External/environmental risk</li></ul>Flexibility <br />Risk<br />Benefits <br />Cost <br />Copyright 2009 Esposito Consulting Group<br />
  16. 16. Understanding risk broadens range of possible outcomes<br />Risk impacts estimates of costs, benefits, & flexibility <br />Risk assessments help capture the amount of:<br />Uncertainty that the technology may not work as expected<br />Uncertainty that internal/external conditions may change, jeopardizing potential investment benefits<br />Uncertainty that the vendor will miss or fail to meet its contractual obligations <br />In business cases, there’s a natural human tendency to: <br />Overestimate benefits and/or<br />Underestimate costs and/or<br />Ignoring risks – resulting in<br />An ROI that is too optimistic<br />Copyright 2009 Esposito Consulting Group<br />
  17. 17. Adjusting for risk<br />If a risk-adjusted ROI still demonstrates a compelling business case, it raises confidence that the investment is likely to succeed, since the risks that threaten the project have been taken into consideration and quantified. <br />Copyright 2009 Esposito Consulting Group<br />
  18. 18. Consider flexibility options<br />Flexibility = investing in additional agility or capacity now, which can — with some future additional investment — be turned into future business benefits<br />It is the value of the option or ability to take a second action in the future<br />The value of the option always comes at an incremental future cost (if no future investment is required, it should be treated as a normal benefit in the business case)<br />Black-Scholes model is what VAL IT uses to value flexibility options<br />Copyright 2009 Esposito Consulting Group<br />
  19. 19. Typical investments in flexibility options<br />Upgrades<br />Network bandwidth<br />Training<br />Infrastructure<br />Architectures<br />…any change that will require a second investment before additional value can be achieved<br />Copyright 2009 Esposito Consulting Group<br />
  20. 20. Flexible vs. non-flexible options<br />Get B<br />Do A<br />Tactical Solution<br />+ the Option<br />for C<br />OPTIONS<br />+ the Option<br />for D<br />Get B<br />Do A<br />+ the Option<br />for E<br />Strategic Solution<br />Copyright 2009 Esposito Consulting Group<br />
  21. 21. Metrics<br />Primary stakeholders should be held accountable for benefits realization and optimization<br />Each metric must have an owner, an individualwho is held accountable for that commitment<br />Typically IT is accountable for cost savings in IT department while business is accountable for revenue increase, cost savings/productivity gains in business unit<br />Copyright 2009 Esposito Consulting Group<br />
  22. 22. Strategic Planning Paradigm<br />Organizational Unit Strategic Plan(s)<br />Create IT Strategic Plan & Project Portfolio<br />Maintain IT Strategic Plan<br />Manage IT Portfolio<br />Business Goals<br />Expected Return<br />Business Metrics<br />Results of<br />Metric Measurements<br />Plan<br />Project<br />Select<br />Approach<br />Deploy<br />Metrics<br />Measure<br />Benefits<br />Optimize<br />Results<br />Initiate<br />Implement<br />Make Operational<br />Copyright 2009 Esposito Consulting Group<br />
  23. 23. Contact Us<br />Esposito Consulting Group<br />303 Third Street, Suite 206<br />Cambridge, MA 02142<br />p: 619.301.9708 | f: 617.812.0477<br />e: MicheleEspositoECG@gmail.com<br />Turning challenges into opportunities<br />Copyright 2009 Esposito Consulting Group<br />