Evaluating IT Investments
There are two sides worth evaluating before a proposed IT investment: benefits (+) and costs (-). Both uses credibility as the critical element, special care should be taken with the assumptions supporting each.
Benefits of IT investments can be both tangible and intangible:
Tangible benefits can be broken down into direct, day-to-day savings and increases in working capital or available cash resulting from reductions in assets such as inventory and account receivable
Intangible benefits are difficult or impossible to quantify, so they generally provide a greater strain on credibility than tangible benefits. These are also called non-financial benefits
Some of the benefits I would consider are the following:
Tangible
Lower maintenance costs
Faster implementation
Increased sales volume
Greater financial returns
Lower overhead
Reduced cash-to-cash cycle
Intangible
Customer retention
Customer service Improved scheduling
Visibility of order status
Workforce redeployment
Employee satisfaction and efficiency
When estimates are required to justify intangible benefits, the best method is to build a consensus rather than use an individual’s opinion.
On the cost side, tangible, direct costs are straightforward like cost of the IT product, licensing and maintenance plus estimates for consulting fees, training, and change management.
Additionally, staff and resources assigned to the project and opportunity costs need to be included.
The three categories of costs are capital expenditures, one-time project expense, and ongoing support activities. The capital expenditures are amortized over the expected life of the technology. If this amortization period exceeds the actual product life, the costs will be underestimated. One–time project fees often contain hidden costs such as fees to investigate alternative systems, training travel expenses, data conversion and normalization, or even lost productivity when employees go through a learning curve. Ongoing support costs include annual license and maintenance fees for vendor support, bug fixes, upgrades, taxes on fixed assets, and IT support staff.
A final cost to consider is intangibles and one good example is the cost of not implementing the project. Sometimes, the costs of acquiring new IT capability are outweighed by the greater, but intangible costs of not doing so.
Not so long ago, I was working for a consulting firm (partners of SAP and i2 Technologies) among other large software companies and the implementation projects completed within budget and time were the minority. I firmly believe that IT projects come in significantly over the budget because managers:
Overlook major cost items such as operational support costs
Use estimates that assume everything will go according to plan
Purposely underestimate costs to secure project approval
Credibility is the key to any cost justification, and top management may challenge elements not properly supported.
