FSN: Accounting for IT Investments

Accounting for IT Investments

21st November 2005
There's no accounting for value. Traditional financial metrics don't do much to help you to measure the potential value of technology investments. So if you want to justify them, you may need to spend more time thinking about business benefits and strategy than you do crunching numbers. Lesley Meall explains why.

Lesley Meall, FSN Contributing Editor

You are a finance professional, so knowing the cost of everything and the value of nothing may well be an occupational hazard. But over the past few years, the rest of the business world has also demonstrated a penchant for numbers, and a growing propensity to count and measure everything it considers of potential value. When this means adding up the number of Boxster's manufactured by Porsche or the number of ERP systems sold by SAP, then this is all very well, but measuring their value is an entirely different proposition.

The initial purchase price may be a no-brainer, but from this point on cost of ownership becomes an increasingly complex calculation, while putting a meaningful value on the benefits of ownership is well nigh impossible - whichever feat of German engineering you are contemplating.

The decision to buy a Porsche is largely emotional. All you need is the inclination, money to burn and you're away. Not too long ago, the same was true of business software and systems. 'When it comes to IT purchases, a lot of the decision-making process is about rhetoric and storytelling,' suggests Martin Fahy, an accounting and information systems lecturer and researcher at the National University of Ireland. 'We like stories that begin with "Once upon a time" and end with "happily ever after", he says, 'so we bought the story of ERP.' But as he adds: 'The Brother's Grimm told horror stories and there is evidence to suggest that ERP systems have not delivered the benefits expected.'

In an attempt to minimise the likelihood of any similarly expensive disappointments in the future, businesses have adopted a weird and wonderful mixture of measurement techniques. Applied information economics, balanced scorecard, customer index, economic value added, economic value source, internal rate of return, net present value, return on investment, portfolio management, total cost of ownership and return on infrastructure employed have all been employed with varying degrees of success by those keen to measure the cost of a project and weigh it against the benefits or efficiencies it is expected to deliver.

Each has its strengths and weaknesses, so how do you select the most appropriate approach? 'You need to understand what your business perceives to be of value,' says Ian Taylor, a group principal with Forrester Research, 'otherwise you can't choose the right measurement for your organisation.' Fahy agrees. 'Technology should be about value creation,' he says, adding: 'If it doesn't support shareholder value don't invest in it.' Some metrics are better at measuring the potential for this than others.

Applied Information Economics allows measurement of uncertain outcomes; Balanced scorecard allows a direct link between business strategy and financial performances; Customer index determines value by tracking revenue, cost and profit on a per-customer basis; Economic Value Source allows four-way value measurement, increasing revenue, improving productivity, decreasing cycle time and decreasing risk; while Portfolio management allows IT projects to be managed as portfolios, in the same way as an investor would manage stocks, bonds and mutual funds.

Rather than focus solely on financial metrics, they can help you to take a wider more business-oriented view. 'If technology is seen purely as a cost to be managed, you will struggle to exploit its potential to add value, let alone measure it,' says Taylor . 'Consider technology's impact on factors such as earnings per share and flexibility in the marketplace, think about business benefits and competitive advantage,' he suggests, 'instead of focussing purely on cost.'

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