Taking the measure of IT

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Managers who purchase IT equipment don't have any
easy life. Ever since the Harvard Business
Review published Nicholas Carr's ground-breaking
essay 'IT doesn't matter' in May, 2003, they
have found it difficult to defend their budgets
and allowances.

There's no doubt that IT departments certainly
know how to build large-scale systems. But can
they guarantee that their deployment yields an
ROI comparable to or better than other
investments? Faced with ever-tightening budgets
and Carr's widely-cited paper, even the members
of the Institute of Electrical and Electronic
Engineers (IEEE), the world's leading
professional association for the advancement of
technology, are unsure.

'Unfortunately, we do seem to have a problem',
states Karl Reed, computer scientist at
Australia's La Trobe University, in the respected
periodical IEEE Software, earlier this year. 'If
we're unable to do this, companies will cease
investing in IT because, even if it's technically
successful, it will negatively affect their
bottom line.'

Reed was the immediate past chair of the IEEE's
Technical Council on Software Engineering. This
council is endorsing and sponsoring a conference
scheduled for early 2007 to promote the
development of methods to quantifying the yield,
in the investment sense, of IT projects and
proposals. In the true IT-fashion, effort was
spent in getting at least the title right:
Exploring Quantifiable Information Technology
Yields (EQUITY).  Dutch computer scientist Chris
Verhoef, an executive board member of the
council, is one of the organisers of the
conference, drawing on his research in this field
at the Vrije Universiteit in Amsterdam.

IT, the main factor?

Verhoef's published his research in the
scientific journal Science of Computer
Programming last year and since then, his paper
has been one of the journal's most-popular
downloads.

The reason for its popularity, he says, is that
quantitative financial analyses for major IT
investments is rarely attempted. Verhoef is one
of the few scientists that has access to data
needed for this kind of studies. For several
years he was the scientific advisor for Deutsche
Bank and still acts as a scientific consultant
for many companies.

In the finance sector, he points out, IT has
become a major cost. In the Netherlands, the
larger banks spend 22% of their operating costs
of information technology, according to Verhoef.
This figure seems too high, he says, and the goal
is to trim it. He says: 'To them it is like a
portfolio of shares. Is the mix right? What
should go in, what needs weeding?'

Indeed, every sizable investment---building a
factory, acquiring a fleet of vehicles or hiring
a hundred new employees---needs a business case.
For years, IT was the exception. That's because
IT investments made very clear business sense. A
company could replace three hundred data typists
with a single mainframe.

Most of these routine tasks have now been
automatised, says Verhoef. The next step is much
more complex. Banks need to face complex issues
such as how they can gain more customers. Is
internet banking the way forward or should banks
open more branch offices to increase client
contact and sell a wider variety of services?

Lack of data

As evaluating IT investments is hard, Verhoef has
come up with a method to quantify them using
common financial techniques. He focuses on
tailor-made software and not on computer hardware
investments, networks or package acquisitions. He
combines IT portfolio management and benchmarks
to the costs, duration and the financing of IT
projects in order to provide insight into the
standard indicators such as net present value,
internal rate of return and return on
investment.

In the course of his paper, Verhoef deals with
the industry's fondness for a low Total Cost of
Ownership (TCO) and Return on Investment (ROI)
measures, terms used by every IT vendor to market
their products. But TCO is not the crucial issue,
he believes. It is the TCO versus benefit
analysis, given the total costs and the total
benefits, he says. And for ROI, he elaborates, it
is important to know the difference between the
estimated benefits and the actual. As for
estimated benefits, he introduces a new economic
indicator, the 'ROI-IT portfolio's
organisation-wide fantasy factor' or RIPOFF.

Not surprisingly, Verhoef's work is drawing
attention. One of the program committee members
of the IEEE Equity conference in next year, which
will be held in Amsterdam, will be Paul
Strassmann, the former chief information officer
at the US Department of Defense, space agency
NASA and Xerox. No doubt the conference will have
no problem filling its delegate list.

13 Mar 2006
By Gijs Hillenius

Meer weten over de wondere wereld van ICT 
in Jip en Janneke taal? Ga dan naar de
knipselkrant van Chris Verhoef