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9 January 2007

Justifying IT investment 1: measurement

By Andrew Clifford

We can not make the IT investments that we need to make because we can not calculate the return on investment (ROI). Using a basket of management objectives lets us estimate ROI, and can justify the investment we need.

We see the lack of IT investment everywhere: out of date technology, badly maintained systems, security risks, poor compliance, poor strategic fit, and so on.

Intuitively we know that there is a strong case for fixing these problems. It is not just a "nice to have" to make our jobs easier. But because IT management is complicated and factors are interrelated, it is hard to estimate the direct financial benefit of a single investment. This makes the investment hard to justify. We usually have to wait until there is a crisis before we can fix things; or we tack infrastructure improvement onto business projects and hope nobody will notice.

This is a tragedy. We see our systems gradually sliding into unsupportable "legacy", but we are powerless to stop them. If we could find a way to quantify the financial benefits, we could make the case for doing something about it. We could compete for funds with other business projects.

There is a way to quantify the financial benefits of IT investments. It starts by measuring your systems so that you can quantify improvement. And then it puts a financial value on the improvement.

You can measure your systems using system governance techniques. In overview, this involves:

  • Define a basket of management objectives for your IT. This should cover everything that is important about your IT systems from a management viewpoint, such as usability, service, risks, viability, compliance, future flexibility and strategic fit. Express each objective as measurable criteria and agree weightings that reflect their relative importance. (See deciding what is important and defining criteria in detail.)
  • Review your systems against the criteria to get a system governance score for each.

As well as measuring each system, estimate the relative size of each system. It does not matter what units you use, as long as you are consistent. Sum all the sizes to give an overall "volume" for your IT. Use the relative sizes to calculate a weighted average system governance score.

This approach gives an objective measure of the fit of your systems to your management objectives. It shows which systems and which criteria are priorities for improvement. It gives a balanced view across all objectives and all systems, not biased toward the latest technology fashions. It reflects agreed priorities. It allows "what if" analysis, to predict how scores will change if improvements are made.

So far, so good. We have a way to decide where the best improvements can be made. But this is not enough. We need to translate these measurements into financial benefit. Only then can we say whether the improvements are a worthwhile investment, and only then can we compete for funds with other business projects.

To do this, we need a way to estimate the financial benefit of improvements. Next week I will cover simple calculations that achieve this, and so allow us to justify IT investment.

Next: Justifying IT investment 2: calculations

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