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Calculating the Business Value of Information Technology

“The ROI of IT”

Presented to

Healthcare Information & Management Systems Society

ME-PI Task Force Jan. 26, 2007

Dr. Jim Langabeer, CMAAsst. Controller, MD Anderson Cancer Center

Assoc. Professor, Univ. of Texas School of Public Health

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Calculating Business Value

…a process for analyzing, documenting, and managing IT projects to maximize key performance metrics in IT (data, infrastructure, applications)

… a governance model that seeks first to change an organization’s performance, and then aligns:

Investments > Responsibilities > Accountabilities > Results/Metrics

…not just financial value, it can include many other types of value as well (e.g., clinical efficacy)

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Cost

s/V

alu

e

IT Value Over a Project Life Cycle3 key goals

Life Cycle/Time

Investment

ImplementationInitial

BusinessCase

On-GoingOps.

GovernanceApproval

Upgrade/Replace

1. Escalate initial point of earned value

2. Increase max. benefit range

3. Expand the benefit period

Expenses

Benefit

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The Major Activities in Calculating ROI

1. Align Investments to Strategy/Portfolio2. Establish formalized ROI criteria3. Define and Measure Performance and

Productivity metrics at most discrete level (Pre- and Post:• Time and motion studies• Productivity analyses (output ÷ input)• Statistical process control charts• Metric differential analyses• Wait line minimization models

4. Convert metrics into associated cash flows (Identify Benefits and Costs); Create ROI Model

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# 1: Align Investments to Strategy:Investments Should Model the Ideal Portfolio

Operational

Infrastructure

StrategicClinical

Transactional

Investment Criteria

Ideal Portfolio Allocation

Impact on Value

Strategic 15% of total capex $X # of apps./year

Financial, Patient Satisfaction

Clinical 20% of total $ Patient Satisfaction, Quality, Productivity

…

Infrastructure

10% of total $ System up-time, reliability, access, TCO

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#2: Establish ROI Investment Criteria• Establish investment committees• Define and measure true cost of capital• Establish required hurdle rates based on the

CoC• Ensure a set of common business value

metrics• Free cash flow?• Net present value?• Payback?• Internal rates of return?

• Most common practices:• “accept all projects greater than the

hurdle rate”• “accept all projects with positive NPV”• Rank all projects by investment type and

accept top 3

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#3: Define and Measure KPI & Productivity1. Based on investment type, translate performance into specific metrics,

such as these• Cost per transaction Processed• Transactions processed per hour• Patients visited per nursing hour• Physicians per available bed• Cycle times

2. Measure pre- and post- performance:• Randomly over an extended period of time• Using Six-Sigma (SPC), Time & Motion Studies, etc.

3. Convert KPI’s into $ values

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IT Impacts a broad array of Metrics

ReducedCosts

Productivity

BusinessValue

IncreasedCapacity

LaborSavings

ReduceManualSteps

Cycle Time

CompetitivePosition

PatientSatisfaction

Controlsand

Compliance

RevenueGrowth

Brand

Communicationand

Reporting

Strategic/Informational

Operational/Transactional

Infrastructure

Extending System

End of Life

SystemOperability

ImprovedClinicalEfficacy

MortalityMorbidity

ReducedPatientErrors

SeamlessPatientData

Clinical

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Analyze changes in Metrics over time

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#4: Convert Metrics into Cash FlowModel Benefits & Costs

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PRE-IMPLEMENTATION

POST-IMPLEMENTATIONDEPLOYMENT

•Executive Review of Spending Proposals•Steering Committee Evaluation•Business Case Justification

•Measurement of Earned

Value to date•Portfolio Monitoring•Mid-Project Checkup

•Formal go-live review•Post-Implementation ROI review

Monitor Business Value at Multiple Stages

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•Implemented a document imaging system, for use in multiple areas throughout the hospital

•An application, integrated with our core ERP and Clinical IS that provides direct access to documents electronically

•Reduces manual effort in handling papers, filing, storing, cataloging, etc.

•Started first rollout in transactional department (Accounts Payable) but is subsequently being rolled out to another 5-10 departments

Example: Document Imaging

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•Used to automate workflow for over 25,000 transactions using OCR & Imaging•Identified most meaningful metric was Average Cost to Process an Invoice•Using SPC and time studies, we documented over a 6-week period:

•$/transaction fell from $5.15 to $4.98 (3% reduction)•Process cycle time fell by 5 days•Eliminated significant manual paper backlogs•Eliminated 2 redundant tracking databases•Total operational impact on budget > $350,000 annually•Total implementation costs were <$700,000 over 5 months•5-year NPV was $235,000 for this initial rollout alone

•Follow up analyses, post-implementation are conducted by Management Engineering to ensure compliance. Our governance model gives the implementing department the responsibility and accountability to obtain these results.

Example: Document Imaging

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•Many clinicians and administrators do not feel their work can be quantified•Metrics, especially detailed KPI’s, do not exist in many places•Even if the KPI exists, measurement is not always welcome and is not routine•While it is a simple concept, Time studies-used for calculating labor productivity and cycle time reductions-- are not well understood•Holding people accountable for results they promise during business cases are usually difficult aspects of governance•Management Engineering departments can play a major role in this process

Major Challenges in Calculating Value

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Thanks !