Measuring the Value of IT - Total Economic Impact (TEI)

"Total Economic Impact" is the 3rd in the series of postings on measuring the business value of IT that I introduced in my posting of July 7, 2009.  The 2nd in the series was the "Business Value Index" and TEI contains a number of characteristics that overlap with BVI:

  • the use of a business case
  • valuing intangibles
  • calculating financial returns.

TEI adds:

  • A methodology for quantifying risk
  • The value of flexibility.

TEI has been used by Forrester for valuing IT investments.  It is of limited use in measuring the value delivered by IT in "normal operations" unless you take a view that the while IT budget is the investment. TEI is claimed to be more rigorous than BVI but the price of this is greater complexity. TEI has four main components for assessing the total impact of a new investment: 1. Costs- the impact on IT This looks at the costs incurred by IT compared to the costs of the status quo.  From the desired "Total Cost of Ownership" perspective, the "impact on IT" can be positive when money is saved or negative when money is spent. 2. Benefits - the impact on the business Essentially, this is similar to the "Costs" analysis in that monetary flows, negative and positive, are aggregated, in this case, for all the non-IT departments of the organization.  Such flows would include improved productivity, training and so on. 3. Flexibility - Future Options Derived from financial trading world, flexibility is measured as the value that this investment creates in terms of the ability to pursue other options in the future which are not currently available. The value of future options created is aggregated and added to the TEI,  For example, the investment being considered may be a change in software architecture which has a certain immediate value.  Additionally, at some point in the future, this change in software architecture could make it possible to switch to a cheaper hardware platform.  The switch to the less expensive hardware platform is not part of this project so the savings cannot be included in this TEI but there is some future value in creating the options and that value can be included in this TEI. 4. Risk The first three types of analysis in TEI are additive.  The risk analysis reviews these the analysis of these three and generates an range of potential outcomes.  From this range, an expected or most likely value can be deduced and applied.  For example, if there is a 90% chance that the cost of training the business users will be $10k and a 10% chance that it will be $20k then the risk policy of the organization can be applied to make the risk adjusted cost $10k, or $20k or (10*0.9 + 20* 0.1) = $11k or some other value. Risk can be thought of as a multiplier of the sum of the first three to created "risk-adjusted costs" and "risk-adjusted benefits" to generate a "risk-adjusted ROI."

Written by Michael D. Harris at 17:59

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