CALCULATING THE VALUE OF IT

CALCULATING THE VALUE OF IT

By Bob Lewis

Posted February 07, 2003 12:00 Pacific Time

“Imagination is the only weapon in the war against reality.” — Jules de Gautier

Gartner has achieved fame and fortune through the publicity it generates from regular publication of outrageous “TCO (total cost of ownership)” calculations. It’s time for Gartner to share the fame if not the fortune.

IS Survivor Don Deck, in response to my recent critique of Gartner’s $3,000 annualized TCO for a PDA, proposed two other useful measures: TCOL vs. TCOD (Total Cost of Living vs. Total Cost of Dying) and TCOI vs. TCOE (Total Cost of Ignorance vs. Total Cost of Education). Don’s conclusion: “I suspect that this would prove that it would be most cost-effective if we all died young and ignorant.”

Such are the hazards of calculating cost without value, as I suggested less eloquently when I debated Gartner on the subject of TCO back in 1993. Gartner needed less than a decade to develop a value-based measure — TVO, or Total Value of Ownership. I’m confident the difference between this and the already well-established “ROI” surely is more than just Gartner’s need to coin its own term, just as I’m confident the reason they gave me no credit for anticipating them by nearly 10 years was mere oversight.

Also a mere oversight: Has anyone actually seen a Gartner TVO?

The problem with calculating the value of IT is that it’s an enabler of value, not a provider of value. That is, the value comes from the improvement in business processes made possible through the use of IT, not the technology itself.

If you’re planning to drop a bundle of cash on a cost/benefit analysis of IT in your company, let me help you save your budget for more important matters. Here’s a straightforward methodology you can use without ever engaging an outside consultant or pundit: The cost of IT is equal to the IT budget. That’s the easy part, but then, measuring cost is always the easy part.

For the benefit:

1. Calculate the TCBP (total cost of every business process) IT supports.

2. Design the BPAP (best possible alternative processes) that use no technology more complicated than a hand calculator.

3. BPAP – TCBP is the value provided by IT. (BPAP – TCBP)/TCBP is the return on IT investment — astronomical in nearly every case, I suspect, even more astronomical than the consulting fee you’d pay for a TVO study.

This is the only realistic way to assess the value of any enabler — compare what you’re doing to the best you could do without it. The process is tedious but not particularly complicated.

I’d offer to perform the analysis for you, except for one thing.

It’s too tedious.

Bob Lewis is president of IT Catalysts, an independent consultancy specializing in IT effectiveness and strategic alignment. Contact him at rdlewis@issurvivor.com.

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