Justifying Investments
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Justifying Investments

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A case for using objective criteria to select investment proposals.

A case for using objective criteria to select investment proposals.

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    Justifying Investments Justifying Investments Presentation Transcript

    • Justifying Technology Investments
      Using Governance Practices to Ensure Valid Decisions
      Copyright 2009 Esposito Consulting Group
    • Objective
      Effective Governance Practices will allow you to:
      Build more accurate and credible business cases
      Incorporate benefits, costs, flexibility and risk factors into your business cases
      Understand the most important financial concepts: return on investment (ROI), net present value (NPV), internal rate of return (IRR), and payback period
      Prioritize and select projects based on their financial projections
      Copyright 2009 Esposito Consulting Group
    • A poor track record has contributed to management skepticism of technology investments
      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
      98% of companies with mature project/program justification processes reported 0% failure rate
      A recent Morgan Stanley study estimated that US companies spent $130 billion on failed IT projects in the prior two years2
      Copyright 2009 Esposito Consulting Group
    • IT budgets and successful project delivery
      Maintenance & operations
      75%
      Successful projects
      New projects
      1/3
      25%
      Potential failures
      2/3
      Copyright 2009 Esposito Consulting Group
    • IT business case justifications
      A justification process provides transparency into the value of technology investments
      A consistent, repeatable justification process will:
      Clarify how the organization will use its resources to accomplish a particular goal
      Identify not only the costs but also the benefits and risks associated with the investment
      Provide a consistent method for prioritizing and selecting projects
      Ensure tracking of metrics to measure costs, benefits realization, and customer satisfaction
      Copyright 2009 Esposito Consulting Group
    • Business cases are a proven way to justify technology investments
      The business case approach:
      Aligns technology investments with business goals and objectives
      Provides a consistent ROI methodology across all projects over time
      Establishes a uniform, meaningful dialog between IT and the business, in terms the business understands
      Defines metrics that business stakeholders have agreed to, helping to ensure benefit realization and accountability
      Identifies risks and risk mitigation strategies
      Ensures that strategic flexibility options are considered and valued
      Copyright 2009 Esposito Consulting Group
    • VAL IT is a proven, consistent, & effective methodology
      Provides the techniques and tools to quantify, justify, and value investments
      Aligns project goals with business goals and assigns accountability
      Supports decisions with a business case
      Takes into account risk and flexibility options
      Facilitates “what if” scenarios
      Assigns clear accountability
      Allows one to view all decisions as a portfolio of investments
      Copyright 2009 Esposito Consulting Group
    • All projects are subject to risk
      • Project size and scope
      • Technology risk
      • Vendor risk
      • Education risk
      • Cultural/behavioral risk
      • Training risk
      • Organizational risk
      • External/environmental risk
      Flexibility
      Risk
      Benefits
      Cost
      Copyright 2009 Esposito Consulting Group
    • Understanding risk broadens range of possible outcomes
      Risk impacts estimates of costs, benefits, & flexibility
      Risk assessments help capture the amount of:
      Uncertainty that the technology may not work as expected
      Uncertainty that internal/external conditions may change, jeopardizing potential investment benefits
      Uncertainty that the vendor will miss or fail to meet its contractual obligations
      In business cases, there’s a natural human tendency to:
      Overestimate benefits and/or
      Underestimate costs and/or
      Ignoring risks – resulting in
      An ROI that is too optimistic
      Copyright 2009 Esposito Consulting Group
    • Adjusting for risk
      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.
      Copyright 2009 Esposito Consulting Group
    • Consider flexibility options
      Flexibility = investing in additional agility or capacity now, which can — with some future additional investment — be turned into future business benefits
      It is the value of the option or ability to take a second action in the future
      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)
      Black-Scholes model is what VAL IT uses to value flexibility options
      Copyright 2009 Esposito Consulting Group
    • Typical investments in flexibility options
      Upgrades
      Network bandwidth
      Training
      Infrastructure
      Architectures
      …any change that will require a second investment before additional value can be achieved
      Copyright 2009 Esposito Consulting Group
    • Flexible vs. non-flexible options
      Get B
      Do A
      Tactical Solution
      + the Option
      for C
      OPTIONS
      + the Option
      for D
      Get B
      Do A
      + the Option
      for E
      Strategic Solution
      Copyright 2009 Esposito Consulting Group
    • Metrics
      Primary stakeholders should be held accountable for benefits realization and optimization
      Each metric must have an owner, an individualwho is held accountable for that commitment
      Typically IT is accountable for cost savings in IT department while business is accountable for revenue increase, cost savings/productivity gains in business unit
      Copyright 2009 Esposito Consulting Group
    • Strategic Planning Paradigm
      Organizational Unit Strategic Plan(s)
      Create IT Strategic Plan & Project Portfolio
      Maintain IT Strategic Plan
      Manage IT Portfolio
      Business Goals
      Expected Return
      Business Metrics
      Results of
      Metric Measurements
      Plan
      Project
      Select
      Approach
      Deploy
      Metrics
      Measure
      Benefits
      Optimize
      Results
      Initiate
      Implement
      Make Operational
      Copyright 2009 Esposito Consulting Group
    • Contact Us
      Esposito Consulting Group
      303 Third Street, Suite 206
      Cambridge, MA 02142
      p: 619.301.9708 | f: 617.812.0477
      e: MicheleEspositoECG@gmail.com
      Turning challenges into opportunities
      Copyright 2009 Esposito Consulting Group