The Business of IT
Calculating the Value of IT Infrastructure in Government
Demonstrating the benefits of an investment in IT infrastructure—both hardware and software—can be difficult in government organizations. As in other large organizations, managers must make a business case for any additions or improvements, which will be prioritized against all other requests for funding.
Since there are many different ways to frame business cases, IT managers must choose the one that is most suitable for their specific organizational culture. This is as true among government organizations as it is for businesses. Aligning IT with other business priorities is essential. In the government sector, IT organizations have found success in articulating business cases using the concept of public value in the approach to building portfolios of projects and initiatives.
Constructing a business case that demonstrates how infrastructure improvement leads to better productivity or improved service is a difficult process. Let's take a look at some solutions for defining and measuring the value behind IT infrastructure investments that are being adopted by real government IT organizations.
A common complaint within IT organizations is that they receive too many requests from too many different business areas—and each request, of course, has a high degree of urgency. New initiatives tend to map to individual departmental regulatory requirements or mission priorities. These initiatives may appear to be a random assortment, but they are often closely aligned to the public value sought by a given department.
On the other hand, operating costs that are apportioned by how much is used to support individual department operations can hide the cost (and value) of enterprise-wide functions or shared services. In this environment, the value of investments in new infrastructure or improvements to existing infrastructure that have an enterprise-wide impact or that indirectly map to the objectives of individual departments can be extremely difficult to evaluate properly.
Consequently, the overall IT organization often finds it difficult to support an enterprise view of IT as described by the GSA Federal Enterprise Architecture Framework (whitehouse.gov/omb/egov/a-1-fea.html
). In this environment, most efforts to employ a shared view of enterprise architecture, a common business case development model, and a portfolio management process to place IT investment requests and spending on a level playing field are difficult to realize. A more effective model is to support a portfolio of IT activities that effectively maximize public value benefits. This requires that common public value criteria be selected and enforced throughout the processes of business case development, portfolio management, benefits realization, and assessment.
There are several real issues with enterprise-wide IT investments. First, they have a more indirect and longer-lasting impact in terms of the public value benefits. These benefits are accrued, often unevenly, by different parts of the organization in ways that are not always easy to identify up front. In addition, the associated risks and costs are more readily perceived than the less readily visible and quantifiable public value.
A business case should be based on how an infrastructure investment enables future investments as well as current activities. There are different ways in which to calculate this value, each with its own advantages and drawbacks, and each with a different degree of fitness for a particular organization's culture and maturity.
Mathematical These methods are based on a mathematical modeling of potential benefits. One effective method, called real options, is based on financial theory. It embeds the consideration of future change and flexibility by explicitly considering the right to take an action (that is, the real option) at a given cost for a given period of time. Options include deferring, expanding, staging or abandoning investments; changing inputs or outputs; and developing pilots.
Real options are particularly appropriate when an investment decision is influenced by future events. In the case of IT infrastructure, such events may include the following: regulatory requirements, business demand, or even a critical event such as a major operational failure.
Simulation Uncertainty analysis is based on Monte Carlo simulation, which uses automated tools to calculate the results of alternative scenarios based on the selection of variable values and repetition of the process. The simulation requires the identification of a range of values (such as the number of affected workstations or electronic channel uptake) and the probability distribution for each variable. The outcome of a simulation is a range of possible results and permits the identification of the mean value of benefits as well as of costs and risks. Carefully choosing value and risk variables to reflect the possible impact of infrastructure investments enables placing the return of such an investment in perspective.
Scenarios When mathematical or simulation models are impractical or do not fit the organization culture and skills, scenario-based techniques can be used instead. Taking into consideration the agency business or mission, political priorities, and environmental trends (including technology), the organization can develop a limited number of plausible scenarios for the next three to five years. Each scenario should focus exclusively on demonstrating the benefits of the infrastructure investment.
Unlike longer-term planning exercises, scenarios do not need to be mutually exclusive and can be assigned probabilities. Scenarios can take into account future elections, outcomes of political debates, and possible IT market events such as acquisitions or major shifts in vendor strategies.
Worst-Case Scenario This variation of the scenario-based approach is applied when the IT organization believes an investment is urgently needed to meet forthcoming business or mission challenges, or to simply maintain current service levels. When infrastructure problems are unattended, they worsen and the effort needed to fix them increases. Whoever pushes for changes will likely face resistance and is unlikely to receive credit for their efforts. Such a situation can be partially remedied with a strong emphasis on metrics and measurement relevant to some of the affected performance—such as response time to requests and time to repair. This information must be made widely available so people are aware of possible changes in performance.
Worst-case scenarios intentionally stress the consequences of not making the investment by focusing on negative benefits and increased risks. This approach should be used with great care and only in truly exceptional circumstances. Using this approach routinely could create the impression that the IT organization is trying to overthrow established investment management processes, which would lead to conflicts and misalignment that those very processes have helped resolve.
Choosing a Planning Methodology
Figure 1 summarizes the pros and cons of each method and when to consider them. Once a method is selected, it should be used consistently throughout the organization to ensure comparability.
Figure 1 Business case methodologies
|Real Options (Mathematical)
- Solid theoretical basis
- Not adequate when intangible values prevail
- Value and future value are mostly quantifiable
- There is a solid investment appraisal culture
- Skills are readily available
- Allows exploration of alternative values
- Easy way to build alternatives
- Averages may make little sense with intangibles
- Range selection in variable is critical
- Tangible benefits are prevalent
- Tool support is available
- Allows any combination of tangible and intangible benefits
- Allows exploration of very different scenarios, combining different techniques
- Requires strong discipline to converge toward comparable scenarios
- Time horizon may vary
- Intangible values prevail or actual nature of benefits is unclear
- Organization culture is hostile to other methods
- Effectively visualizes the consequences of not doing an investment
- Simple to build
- Does not help prioritize
- Can be misused
- Investment is absolutely critical and overdue
The effectiveness of any of these approaches depends on a variety of factors. Answering the following questions is a good starting point. How strongly is the approach integrated or compatible with mandatory processes (such as budget and capital planning)? Is the chosen business case method easy to use and effective in communicating value to stakeholders?
Organizations need to balance between flexibility in choosing the value indicators that fit the particular agency and guidance to ensure comparability across agencies. In addition, the ability to use a given valuation metric throughout the investment lifecycle and not only at business case time is vitally important. Likewise, the plan should have utility across different types of investments.
As a consequence, a value approach should be selected and developed in conjunction with the participants in the organization's governance structure. It is essential that the selected framework provide an effective way to communicate value to internal and external stakeholders. This is as true for enterprise executives as for elected officials or agency management.
Acer Maamoun is an Enterprise Strategy Consultant working for Microsoft. He has more than 18 years of experience in IT strategy and business alignment.
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