Protecting your IT investments "How you Invest In Technology May Change Your Business"
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Protecting your IT investments "How you Invest In Technology May Change Your Business"

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Protecting your IT investments "How you Invest In Technology May Change Your Business"

Protecting your IT investments "How you Invest In Technology May Change Your Business"

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Protecting your IT investments "How you Invest In Technology May Change Your Business" Protecting your IT investments "How you Invest In Technology May Change Your Business" Presentation Transcript

  • Protecting Your IT InvestmentsHow You Invest In Technology MayChange Your Business
  • Session Overview• How did we get here• How is Technology an Investment?• Understanding Investment with Valuation• Managing Risk• Future Trends
  • Topic 1:The Basis forTechnology asInvestmentTechnology Is Business
  • Topic:What is an Investment?n in·vest verb (used with object) n to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value. n to use (money), as in accumulating something: to invest large sums in books. n to use, give, or devote (time, talent, etc.), as for a purpose or to achieve something: He invested a lot of time in helping children. n to furnish with power, authority, rank, etc.: The Constitution invests
  • Topic:Determine the Valuen You must first understand if it is valuable n All technology is not valuablen There are 5 types of value n Financial Value n Constituent Value n Reuse Value n Indirect: Industry Value n Indirect: Political and Cultural Value
  • Topic:Profit is the Most ImportantValue in Corporationsn In the private sector for technology to be an investment it must generate profitn Profit is aggregate revenue minus aggregate expenses over a set time periodn Have you ever measured the profit you create?
  • Topic:Constituent Value MostImportant inGovernments/NGOsn In the public sector technology must generate constituent (citizen, member, etc) valuen Constituent value is a measurable quantity of improvement of some variable important to an individual or groupn Example: Voting machines make voting easier by a specific amount
  • Topic:Protecting Investmentn The three most important architect skills n You must define or know the strategy and goals of your organization (business fundamental skills) n You must calculate what is or isn’t an investment (valuation skills) n You must calculate your exposure to risk (risk management skills)
  • Topic 2:ManagingTechnologyInvestment UsingUnderstanding TechnologyCommon Valuation Techniques
  • Introduction
  • Introductionstrategy [ˈstrætɪdʒɪ]n pl -gies 1. skillful use of a stratagem 2. a plan, method, or series of maneuvers or stratagems for obtaining a specific goal or result
  • Topic:Creating Artifacts that Describe TechnologyStrategyn Technology Strategy: a plan for achieving a goal using, or related to, technologyn A Business Goal: n Positively impacts the organization n Is specific n Can be measured n Involves one or more organization groups
  • Introduction
  • Topic:Valuation is Essentialn Technology accounts for 50+% of capital expendituresn Maintenance spend is directly proportional to how we make technology investment decisions.n The language of business is financial.
  • Topic:Valuation is Essentialn Valuation is about decisions to invest or notn It must be combined with project valuationsn In depth valuations require some hard workn Valuation in technology has limits especially where returns are non-financialn An active ‘network’ of architects doing technology valuation creates a huge opportunity for any company
  • Topic:Valuation is Essentialn Technology as investment is a very early field that needs significant researchn The difference is the stock market n Compare the stock impact of a 100 million investment in a new factory to a $100 million investment in a data center n Finance knows how to calculate Return on Equity, Profit Margin, Operating Margin, Increased Sales, etc in the former case n Analysts know how to modify stock estimates and buy/sell ratings based on this information n The market only treats the later as a depreciable asset even if the applications in the data center generate significant profit
  • Topic:Valuation is Essentialn Technologists are best positioned to understand the financial and value implications of investmentn Even simple cost benefit tradeoff analysis would have a huge impact in capex and maintenance spend
  • Topic:Valuation is Essentialn Valuation techniques are used to understand the impact of decisionsn For example should we invest in a new manufacturing plant? n What is the length of the project? n How much will it cost? n What will be the returns? n How do we measure the returns? n How does the capacity impact sales, operations, share-holder price?n Valuation techniques either demonstrate the effectiveness of a particular investment or they allow for common comparison
  • Topic:Valuation is Essentialn Valuation techniques must be used carefullyn Specifically the goals of the valuation and the available data affect what valuation mechanism to usen Comparing a list of projects in a portfolio for potential net income is different from understanding their impact on overhead cost ratio
  • Introductionn Common Valuation Tools – CBA,ROI, NPV, TCOn Advanced Valuation Methods – DCF, Real Options Pricing
  • Topic:Valuation is Essentialn A significant amount of valuation is basic math n Add up the benefits n Add up the costs n Subtract costs from benefits = returnn After sufficient practice much of valuation and it’s impact to the architect job is stable n Run NPV calculations on potential technology on projects in upper 30% of desirability n Keep track of CBA on decisions made at the project level
  • Topic:Valuation is Essentialn The hardest part of valuation techniques are deciding on inputs n Example: Understanding discount rate to use for NPV calculationn Technology valuation is limited by available financial options n Many advanced capital valuation techniques involve market options for calculation such as bond issuancen Valuation can become an endless search much like analysis- paralysis n You may do a simple Cost Benefit Analysis then realize you need to adjust benefit estimates using time value of money, etc. etc.
  • Topic:Valuation is Essentialn Believe it or not you make up a lot when using valuation techniquesn Example n listing benefits in CBA requires significant guesswork as to what will or won’t occur when the project deliversn It gets worse when the benefit of the project is non-financial such as constituent value or reuse.n Valuation techniques can be used in conjunction with each other
  • Topic:Valuation is Essentialn Valuation outputs have an impact on common business metrics n Example: if project X adds significantly to overhead it will impact the companies operating margin (gross margin – overhead cost ratio)n Understanding and actively contributing the valuation discussion is a function of technology as businessn Clearly communicate in terms of business impacts (customer, product, finance, market, operations or sales related)
  • Topic:Valuation is Essential
  • Topic 2:CommonValuationLesson 2: Valuing TechnologyTechniques
  • Topic:Common Valuation Techniquesn Valuation techniques are ubiquitous in finance and include a huge array of optionsn The most common techniques are n CBA – Cost Benefit Analysis n NPV – Net Present Value n ROR (ROI) – Rate of Return (Return on Investment)
  • Topic:Common Valuation TechniquesFrom The Economic Benefits of Enterprise Architecture, Jaap Schekkerman
  • Topic:Common Valuation Techniquesn Cost Benefit Analysis is n A generalization for any valuation technique n The simplest of all valuation techniquesn CBA is the simplest and therefore easiest to manipulate of any of the techniquesn Requires all costs and benefits be described in a common unit of measure in the same time period (time value of money) n Normally money
  • Topic:Common Valuation Techniquesn CBA calculation involves: n Adding up all of the listed costs to obtain total costs n Adding up all of the listed benefits to obtain total benefits n Subtracting costs from benefits
  • Topic:Common Valuation Techniquesn CBA calculation involves: n Adding up all of the listed costs to obtain total costs n Adding up all of the listed benefits to obtain total benefits n Subtracting costs from benefits
  • Topic:Common Valuation Techniquesn CBA calculation involves: n Adding up all of the listed costs to obtain total costs n Adding up all of the listed benefits to obtain total benefits n Subtracting costs from benefits
  • Topic:Common Valuation Techniquesn Tom has to decide whether to switch to a new persistence mechanism or keep the existing model
  • Topic:Common Valuation Techniques
  • Topic:Advanced Valuation Techniquesn Discounted Cash Flown Real Options Pricingn Technology risk calculations and financial offset (market based)
  • Topic:Engagement Maturity Modeln Assess your organization against value deliveryn Ensure you architects are functioning as a teamn Grow your program through stable phases of architecturen 4 levels n None n Repeatable n
  • Topic:Maturity CategoriesEngagement Shareholder Shareholder Technology Technology Investment Value Costs ValueArchitect Shareholder Level of shareholder Cost of The calculation,interaction with awareness and value created. maintenance and amounts andenterprise. active investment in new development reporting ofSpecialization and technology as a including all technologyactivity adoption. profit center. elements related contribution to to Technology shareholder value. Value.Project & Strategy Partner Org GovernanceProgram Integration Ecosystem SatisfactionSuccessThe methodology The amount of The amount and type Organizational The ongoingby which projects inclusion of of inclusion in awareness and management ofare measured for architecture and IT technology in rating of execution againstsuccess and the in strategy planning partner value and technology strategic goals.relationship to and delivery. integration. support oftechnology value. business objectives and direct support of their roles.
  • Topic 3:CalculatingBusiness RiskLesson 3: Preparing forInvestment Prioritization
  • Topic:Calculating Business RiskRisk: The effect of uncertainty on objectives, whether positive or negative
  • Topic:Calculating Business RiskBasic risk management activities include:n Define a Risk Management Communication Plan – understand how risks will be tracked and communicated to the stakeholdersn Identify Risks – continually refine the list of risks and seek input from everyone involved to help identify risksn Prioritize Risks – determine which risks are the most important to addressn Define Risk Management Strategies – working in priority order, identify one or more strategies for each risk identified, and assign responsibility for the resulting tasksn Work the plan – track the status of the risks and the plans
  • Topic:Calculating Business RiskFour basic strategies to manage any risk:n Risk Transference – transfer the risk to another party. This is typically done with contracts or insurancen Risk Avoidance – reduce the probability that the loss associated with a risk will occurn Loss Minimization – minimize the effect of a loss associated with a riskn Loss Acceptance – accept the loss associated with a risk and have contingency plans in place
  • Topic:Calculating Business Riskn Uncertainty is a fact of life!n Systematically identify things that could go wrong on the projectn Use a formal process to determine the potential negative effects of each risk and a strategy for mitigation
  • Topic:Calculating Business Risk
  • Topic:Calculating Business Risk Use the following Microsoft Excel templates: n P&L template n Project Prioritization Spreadsheet n Project Evaluation Template n Project Prioritization Template n Risk Analysis Template n Risk Table Template n Risk Log Template
  • Module KeyPoints• Map the Technology Strategy to the Business• Value an Architecture• Prepare for Investment Prioritization• Create P&L Statements for a Project