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6 letters that can change your budget TCO & ROI for IT

November 28, 2008

Before we discuss TCO and ROI it makes sense to first identify what level your company is on the budget maturity scale.

At level 1 in the CMF, the company has no defined or repeatable processes for IT business value management. Typically, at level 1, the loudest shouter gets investments approved. At this maturity level, failure or sub-optimal IT investment decision making is likely unless the decision maker possesses an uncanny intuition for choosing good IT investments. Moreover, level 1 decision-making maturity can be successful only in small firms; the method does not scale to larger and more complex enterprises.

At level 2, IT organizations are focused on the total cost of ownership of IT—that is, the organization is seeking to identify, control, and manage all of the direct and indirect costs of provisioning IT solutions to the business. IT organizations at level 2 are focused on cost and quality of services rather than on the business value that those services bring to the firm. Level 2 IT organizations are also increasingly being challenged by the concept of the total cost of connectivity (TCC), as communication channel services (e.g., wireless LAN, cellular voice and data services) expand.

Organizations that are successfully managing TCO and TCC are ready to move to level 3 and begin to focus on the business value that solutions deliver. Generating business value is achieved when the focus on cost shifts to a focus on return on investment (ROI), and a shift in metrics from TCO to ROI reflects the IT organization’s new understanding that business value lies outside of the boundaries of IT. Standard processes at level 3 should include a method and format for developing enterprise business cases as well as a formal investment governance process for making IT investment decisions.

At level 4, organizations take a more sophisticated approach when choosing and managing IT investments, using techniques such as portfolio management, which attempts to optimize a collection of IT investments against certain agreed-upon criteria. Organizations at level 4 also use tools such as a business value index to quantify investment decisions using more than simple financial criteria.

At level 5, organizations begin systematically using investment performance analysis to design, measure, and manage investments for optimal business value. Techniques can include risk-return analyses, real options analyses, and rigorous measurement and tracking of actual and projected benefits. Level 5 techniques are usually based on a strong alignment of business and IT objectives.

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