How to Improve IT Project Success with One Calculation


Posted by Jamie Black

Topic(s): Efficient, Effective and Reliable

Read Time: minute(s)

Information Technology projects can be the most complex and high-profile you will encounter as a finance team member. Perhaps you have read about the trouble with the Phoenix payroll system implemented by the Canadian public service. Or maybe you have direct experience with severely compromised IT investments at your place of work. There is no shortage of such examples. So, what can finance do to help?
In October of 2016, the Auditor General of British Columbia made some suggestions in their report "Getting IT Right: Achieving value from government information technology investments." 

A 60-Second Overview

Regardless of your industry, the report is a valuable read for accountants, and we recommend reading it in full. Here is a quick summary of its major points:

  • IT is important because "every aspect of government depends on IT."
  • Only 29 percent  of IT projects globally are rated "successful."
  • Success is defined as:
    • On Time
    • On Budget
    • AND Value
  • Success depends on: 
    • People
    • Planning
    • Consultation 
    • Governance

The report is an absorbing read, but it fails to elaborate on a significant element: What is "value" and how do you calculate it?

What about "Value"?

The report uses the word "value" 57 times without defining it explicitly. The only comment on how to achieve it is to assess: 

  • Alignment of the project with the organization’s specific needs, priorities, and strategies
  • Contribution to the organization’s desired outcomes
  • Cost
  • Level of risk
While these are good points, they provide no particular direction to those attempting to assess a project's value or measure the success of a project during or after completion. 

ROI to Assess Value Before & After 

Perhaps it's because we believe that numbers are the key to all universal truth (no really, we do), but we argue that finance should calculate proposed and achieved value for IT projects. The accountant in us is very comfortable with Return on Investment (ROI) calculations:
This type of calculation should be used to determine optimal use of your organization's investment. But in our experience, these calculations are rarely utilized when considering IT solutions, particularly in the public sector. 
Why? There are at least two problems with the word "profit" in the context of public sector IT projects.
  1. Public sector organizations typically do not think in terms of profit.
  2. Even if you work outside the public sector, you may reasonably ask, "How does an ERP system (for example) generate profit for any organization?"

"Profit" (and therefore "ROI") may seem like a non-starter. But with a minor change in terminology—replacing "profit" with "calculable benefit"—the concept is applicable to the public sector. The "calculable" part is important; you don't want this exercise to dissolve into imprecise speculation about intangible benefits. Those may also warrant a discussion, but you should not give up the important quantitative analysis. You should focus on those aspects to which you can assign a real dollar value. 

There are two broad categories of calculable benefits that you should consider:

Efficiency of Staff Resources

Your staff spends their entire working lives involved with IT systems. A more efficient, convenient, and highly automated solution will help them do their work faster, more reliably, and with less cross-checking and manual review required. If you estimate the hours that a new IT system might save, and multiply it by your staff's hourly cost, you can measure the economic impact of those time savings.

Reduction or Avoidance of Direct Expenses

There are many direct expenses that a new IT system can help reduce or eliminate. You pay fees to an external accountant—would those fees be reduced if you automated a significant portion of the work they performed? What if your new system could help avoid late payment of invoices and thereby reduce your late fees and penalties to vendors? Perhaps a new system would provide a reduction of ongoing annual maintenance and support costs. 

ROI Calculator for IT Solutions

An Example

Consider a scenario where your current ERP system is no longer supported. You determine that the risk level of continuing with an unsupported system is unacceptable. You have identified three possible solutions and are working through the selection process. You have seen demonstrations and received fee estimates. You have contacted references and determined each option's strengths and weaknesses.

Clearly, there are many considerations (some of which are intangible). But don't underestimate the value of performing an ROI calculation. 

  • Calculable Benefit: How much money will we save with each solution? For example, estimate the following separately for each solution:
    • Hours of staff time saved by reduced data processing
    • Hours of staff time saved by automating report creation
    • Estimate avoided late payment fees to vendors due to improved A/P processing abilities
    • Decreased finance costs due to accelerated AR collections
  • Cost: What is the cost of each solution including all features/modules etc. necessary to facilitate the above benefits over a 5 or 10 year period?

ROI Cal.png

3 Advantages of This Approach

1) Forces Detailed Assessment: All too often we see clients who have only a general understanding of how a particular system will help them. Vendors often do little to help, aside from offering marketing double-talk: "Work Smart", "Improve Productivity", or "Improve Efficiency." These aspirational comments are great, but you need measurable results. 

2) Easy Comparison of Alternatives: You can immediately begin to see some interesting relationships between the options that were hard to see at first:

  • Solution 3 is four times as expensive as Solution 1, but it provides 4.5 times the value. If all else is equal, and the organization can find the $100,000 budget, Solution 3 is the better choice for your organization.
  • Solution 2, while more expensive than Solution 1, does not provide a commensurate increase in benefit. Thus, if the budget did not allow for $100,000 investment, the next best option is Solution 1.

3) Clear Monitoring of Performance: Another advantage of this approach is that your team has identified very specific, measurable goals to monitor the project and assess success. For example, you estimated a calculable benefit value based on specific time savings in report creation and data entry. These time savings should be measured to determine whether you achieved the benefit. Moreover, if your vendor is confident in their abilities to deliver these time savings, you can attempt to include attainment of the advantages into the contract.  

"IT-enabled projects aren’t just about technology—they involve substantial changes to an organization’s culture, business processes, and customers. These projects are really IT-enabled business change. A successful project improves services and allows for more effective use of taxpayer money. And their success or failure is about more than just being on time and on budget, it’s also about achieving expected value."
–Carol Bellringer, FCPA, FCA Auditor General, British Columbia

In sum, ROI calculation is an important tool that allows finance teams to estimate, measure, and demonstrate the value of their IT project.

For more on this topic(s), see: Efficient, Effective and Reliable

Originally Posted on 04 January, 2017

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