The Total Value of Opportunity Approach

Justifying IT investments is moving from art to science as executives look for business cases they can understand and embrace. The total value of opportunity (TVO) approach uses the traditional language of business.

Enterprises should follow the TVO methodology to measure the business value of IT investments. IT must talk the language of business, which TVO incorporates through the use of standard business metrics as the central point of the business benefit analysis. A metrics-based approach also enables monitoring of value delivered throughout the life cycle of the investment, so the accuracy of future business cases can improve based on prior experience. Risk, future uncertainty and enterprise diagnostics assessments must be done to complete the investment analysis picture.

Analysis

The long-awaited era of business and IT convergence seems to have finally almost happened. Although IT is used to some extent by nearly all industries and all players within those industries, it does not appear that this “convergence” is over or that the way to exploit IT for business value is well-understood. Phrases like “IT-enabled business initiatives,” “IT-based productivity gains” or “IT-led business transformations” are still in wide use, and active areas of research and discussion mean that this era is just in its infancy.

Our belief is that IT doesn’t in fact “converge” with business, but merges into business. When concepts merge fully into the business world, they become so important that they become “invisible.” The overall concepts are no longer subject to special treatment by the business, in terms of investment strategy, understanding how they create value for the business, or in fact, how the business measures the impact. Business does not describe road-warrior salespeople as participating in “automobile-enabled” business initiatives, and call centers are not “telephone-enabled.”

To move an IT initiative forward in terms of the merger with business requires that we move away from the detailed feature/function evaluations and toward a linking of IT to business initiatives. This has become a well-known mantra within the IT industry. Clearly everyone knows what to do. The question is how to do it, and do it well. In our ongoing research of common approaches to linking IT capability with business benefit, our findings included the following:

Although many approaches “dig deep” trying to ensure alignment of the IT solution with the business, there is no common language for communicating value across the business-IT chasm, and each approach is left essentially starting from scratch.

IT people talking about the business is not the same as business people talking about the business. IT vendors and users can generally exploit a concept like total cost of ownership (TCO) well, because much more of what’s measured in a TCO analysis is “owned” by the IT organization. Real business benefits can only be determined and “owned” by the responsible parts of the business.

Many users turn to vendor-developed return on investment (ROI) methodologies for ease and speed, but don’t totally trust the objectivity of the results. Despite how objective the methodology itself is, the source is always open to question.

Outsourcing ROI or cost/benefit studies to third parties generally provide more-credible results, but can be costly and time-consuming.

In more than 80 percent of the projects we followed, after the business initiative was launched, the project was not monitored or benchmarked against the original projected benefits.

There is an important task at hand, and everyone understands what it is. However, every approach we studied fell short of the criteria that should drive these approaches. We have embodied these criteria into a methodology known as the “total value of opportunity” (TVO). TVO determines the business value of an IT investment. TVO is a metrics-based approach to measuring business performance, and includes the important factors of risk, time and conversion effectiveness (an assessment of an organization’s ability to convert projected value into actual business benefit). Determining a business case from a small set of agreed-upon business metrics is key to this approach. Metrics and measurement systems are a vehicle for communication between different entities, and using agreed-upon metrics ensures “language alignment” between major stakeholders in an IT investment decision (generally, the IS organization, business owners and finance functions). It is also important to note that these metrics must be rooted in the business, not in IT, as the business and finance stakeholders determine investment criteria for all types of investments, and must bear much of the responsibility for exploiting the technology correctly to deliver the projected business benefit.

The components of the TVO methodology are as follows:

Cost/benefit analysis: Although a traditional cost/benefit analysis alone may not be appropriate for determining the value of IT investments, there is no escaping the development of cost estimates and benefit estimates. We suggest the following rigorous approach, followed by surrounding this exercise with the other components of TVO.

First, cost must be done on the basis of TCO principles to ensure that visible, hidden, one-time and recurring costs are all included. Benefits must be modeled against a holistic framework of business metrics, which represent all of the controllable activities of an enterprise. These can be internally developed or based on an available reference model (contact Gartner to learn more about the Gartner Business Performance FrameworkTM). Direct benefits must be modeled against the measurements expected to improve, along with impacts to other areas of the enterprise’s operations that can be affected positively or negatively. These business metrics are key to the analysis, because they become the “living” part of the business case. These metrics should be monitored before, during and after implementation to determine how the projected value is being delivered.

Future uncertainty: Many IT-enabled business initiatives, particularly those with infrastructure components, are not expected to deliver all their value to a single source, or meet a single need within a precise time frame. A complete value analysis must enable some quantification of the value that a successful initiative would deliver to the business at a future time. As an example, a network upgrade to enable a Web-based enterprise application could bring value to a future self-service application to customers, or future intranet developments. Real options and approaches can be investigated as a method of estimating future benefit.

Organization diagnostics: A complete TVO analysis must include many other elements. Particularly important is the ability to assess the organizational readiness of the enterprise to undertake this initiative and be successful at delivering the projected value. Three types of risk (business, management and technology) must be assessed. IT initiatives need to be measured against the enterprise needs in five areas: Strategic Alignment, Risk, Direct Payback, Architecture and Business Process Impact. These five areas are derived from a Gartner methodology called “The Five Pillars of Dynamic Benefits Realization” (see Table 1). The more closely a project meets the needs of the areas deemed important by the enterprise, the more likely it is that it is a proper investment for that organization. For example, an enterprise that is focused on efficiency and projects with low risk and direct payback will not likely find newer, more-experimental technologies a good idea. Other enterprises that need to find competitive differentiation through innovation or open new markets quickly will find experiments more attractive because they will likely be more risk-tolerant and experimentation will be more in alignment with their business strategies.

Benefits Realization

Source: Achieving Business Value from Technology, a new Gartner Press book

Best practice: Ongoing monitoring of value delivered against value modeled through a standard set of business metrics should allow an enterprise to judge its own ongoing “conversion effectiveness” against similar initiatives undertaken in the past, and against other enterprises using similar methodologies and measures. Enterprises should endeavor to standardize a total value methodology on its own merits, but also exploit similar efforts available in the marketplace. This should not be a huge effort of continual invention. Where a standard, credible methodology exists in the market, it should be leveraged into the total value methodology as outlined. For example, if an enterprise uses real options analysis, this would be a useful model for the “future value” assessment described above. Standardization allows best practices to be shared, interenterprise learning and comparability, and allows a common language of value between vendors, service providers and enterprises.

To read more Business Value of IT research or to learn more about Achieving Business Value from Technology, visit gartner.com/bvit or gartner.com/gartnerpress/murphy.