protecting your it investments "how you invest in technology may change your business"

Protecting Your IT InvestmentsHow You Invest In Technology May Change Your Business

• How did we get here

• How is Technology an Investment?

• Understanding Investment with Valuation

• Managing Risk• Future Trends

Session Overview

Topic 1:The Basis for Technology as InvestmentTechnology Is Business

Topic:

What is an Investment?

n in·vest verb (used with object)

n to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.

n to use (money), as in accumulating something: to invest large sums in books.

n to use, give, or devote (time, talent, etc.), as for a purpose or to achieve something: He invested a lot of time in helping children.

n to furnish with power, authority, rank, etc.: The Constitution invests the president with the power of veto.

n to furnish or endow with a power, right, etc.; vest: Feudalism invested the lords with absolute authority over their vassals.

Topic:

Determine the Value

n You must first understand if it is valuablen All technology is not valuable

n There are 5 types of value

n Financial Value

n Constituent Value

n Reuse Value

n Indirect: Industry Value

n Indirect: Political and Cultural Value

Topic:

Profit is the Most Important Value in Corporationsn In the private sector for technology to be an

investment it must generate profit

n Profit is aggregate revenue minus aggregate expenses over a set time period

n Have you ever measured the profit you create?

Topic:

Constituent Value Most Important in Governments/NGOsn In the public sector technology must generate

constituent (citizen, member, etc) value

n Constituent value is a measurable quantity of improvement of some variable important to an individual or group

n Example: Voting machines make voting easier by a specific amount

Topic:

Protecting Investment

n The three most important architect skillsn You must define or know the strategy and goals of your

organization (business fundamental skills)

n You must calculate what is or isn’t an investment (valuation skills)

n You must calculate your exposure to risk (risk management skills)

Topic 2:Managing Technology InvestmentUnderstanding Technology Using Common Valuation Techniques

Introduction

Introduction

strategy [ˈstrætɪdʒɪ] n pl -gies

1. skillful use of a stratagem

2. a plan, method, or series of maneuvers or stratagems for obtaining a specific goal or result

Topic:Creating Artifacts that Describe Technology Strategyn Technology Strategy: a plan for achieving a goal using, or

related to, technology

n A Business Goal:

n Positively impacts the organization

n Is specific

n Can be measured

n Involves one or more organization groups

Introduction

Topic:Valuation is Essential

n Technology accounts for 50+% of capital expenditures

n Maintenance spend is directly proportional to how we make technology investment decisions.

n The language of business is financial.


n Valuation is about decisions to invest or not

n It must be combined with project valuations

n In depth valuations require some hard work

n Valuation in technology has limits especially where returns are non-financial

n An active ‘network’ of architects doing technology valuation creates a huge opportunity for any company


n Technology as investment is a very early field that needs significant research

n The difference is the stock market

n Compare the stock impact of a 100 million investment in a new factory to a $100 million investment in a data center

n Finance knows how to calculate Return on Equity, Profit Margin, Operating Margin, Increased Sales, etc in the former case

n Analysts know how to modify stock estimates and buy/sell ratings based on this information

n The market only treats the later as a depreciable asset even if the applications in the data center generate significant profit


n Technologists are best positioned to understand the financial and value implications of investment

n Even simple cost benefit tradeoff analysis would have a huge impact in capex and maintenance spend


n Valuation techniques are used to understand the impact of decisions

n For example should we invest in a new manufacturing plant?

n What is the length of the project?

n How much will it cost?

n What will be the returns?

n How do we measure the returns?

n How does the capacity impact sales, operations, share-holder price?

n Valuation techniques either demonstrate the effectiveness of a particular investment or they allow for common comparison


n Valuation techniques must be used carefully

n Specifically the goals of the valuation and the available data affect what valuation mechanism to use

n Comparing a list of projects in a portfolio for potential net income is different from understanding their impact on overhead cost ratio

Introduction

n Common Valuation Tools – CBA,ROI, NPV, TCO

n Advanced Valuation Methods – DCF, Real Options Pricing


n A significant amount of valuation is basic math

n Add up the benefits

n Add up the costs

n Subtract costs from benefits = return

n After sufficient practice much of valuation and it’s impact to the architect job is stable

n Run NPV calculations on potential technology on projects in upper 30% of desirability

n Keep track of CBA on decisions made at the project level


n The hardest part of valuation techniques are deciding on inputs

n Example: Understanding discount rate to use for NPV calculation

n Technology valuation is limited by available financial options

n Many advanced capital valuation techniques involve market options for calculation such as bond issuance

n Valuation can become an endless search much like analysis-paralysis

n You may do a simple Cost Benefit Analysis then realize you need to adjust benefit estimates using time value of money, etc. etc.


n Believe it or not you make up a lot when using valuation techniques

n Example

n listing benefits in CBA requires significant guesswork as to what will or won’t occur when the project delivers

n It gets worse when the benefit of the project is non-financial such as constituent value or reuse.

n Valuation techniques can be used in conjunction with each other


n Valuation outputs have an impact on common business metrics

n Example: if project X adds significantly to overhead it will impact the companies operating margin (gross margin – overhead cost ratio)

n Understanding and actively contributing the valuation discussion is a function of technology as business

n Clearly communicate in terms of business impacts (customer, product, finance, market, operations or sales related)

Topic 2:Common Valuation TechniquesLesson 2: Valuing Technology

Topic:Common Valuation Techniques

n Valuation techniques are ubiquitous in finance and include a huge array of options

n The most common techniques are

n CBA – Cost Benefit Analysis

n NPV – Net Present Value

n ROR (ROI) – Rate of Return (Return on Investment)


From The Economic Benefits of Enterprise Architecture, Jaap Schekkerman


n Cost Benefit Analysis is

n A generalization for any valuation technique

n The simplest of all valuation techniques

n CBA is the simplest and therefore easiest to manipulate of any of the techniques

n Requires all costs and benefits be described in a common unit of measure in the same time period (time value of money)

n Normally money


n CBA calculation involves: n Adding up all of the listed costs to obtain total costsn Adding up all of the listed benefits to obtain total benefits n Subtracting costs from benefits


n Tom has to decide whether to switch to a new persistence mechanism or keep the existing model

Topic:Advanced Valuation Techniques

n Discounted Cash Flow

n Real Options Pricing

n Technology risk calculations and financial offset (market based)

Topic:

Engagement Maturity Model

n Assess your organization against value delivery

n Ensure you architects are functioning as a team

n Grow your program through stable phases of architecture

n 4 levelsn Nonen Repeatablen Definedn Sustained

Topic:

Maturity Categories

Engagement Shareholder Investment

Shareholder Value

Technology Costs

Technology Value

Architect interaction with enterprise. Specialization and activity adoption.

Shareholder awareness and active investment in technology as a profit center.

Level of shareholder value created.

Cost of maintenance and new development including all elements related to Technology Value.

The calculation, amounts and reporting of technology contribution to shareholder value.

Project & Program Success

Strategy Integration

Partner Ecosystem

Org Satisfaction

Governance

The methodology by which projects are measured for success and the relationship to technology value.

The amount of inclusion of architecture and IT in strategy planning and delivery.

The amount and type of inclusion in technology in partner value and integration.

Organizational awareness and rating of technology support of business objectives and direct support of their roles.

The ongoing management of execution against strategic goals.

Topic 3:Calculating Business RiskLesson 3: Preparing for Investment Prioritization

Topic:Calculating Business RiskRisk: The effect of uncertainty on objectives, whether positive or negative

Topic:Calculating Business RiskBasic risk management activities include:

n Define a Risk Management Communication Plan – understand how risks will be tracked and communicated to the stakeholders

n Identify Risks – continually refine the list of risks and seek input from everyone involved to help identify risks

n Prioritize Risks – determine which risks are the most important to address

n Define Risk Management Strategies – working in priority order, identify one or more strategies for each risk identified, and assign responsibility for the resulting tasks

n Work the plan – track the status of the risks and the plans for dealing with each

Topic:Calculating Business Risk

Four basic strategies to manage any risk:

n Risk Transference – transfer the risk to another party. This is typically done with contracts or insurance

n Risk Avoidance – reduce the probability that the loss associated with a risk will occur

n Loss Minimization – minimize the effect of a loss associated with a risk

n Loss Acceptance – accept the loss associated with a risk and have contingency plans in place


n Uncertainty is a fact of life!

n Systematically identify things that could go wrong on theproject

n Use a formal process to determine the potential negative effects of each risk and a strategy for mitigation


Use the following Microsoft Excel templates:

n P&L template

n Project Prioritization Spreadsheet

n Project Evaluation Template

n Project Prioritization Template

n Risk Analysis Template

n Risk Table Template

n Risk Log Template

Module Key Points• Map the

Technology Strategy to the Business

• Value an Architecture

• Prepare for Investment Prioritization

• Create P&L Statements for a Project