Protecting your IT investments "How you Invest In Technology May Change Your Business"

Protecting Your IT Investments
How You Invest In Technology May
Change Your Business

Session Overview
•
How did we get
here
•
How is Technology
an Investment?
•
Understanding
Investment with
Valuation
•
Managing Risk
•
Future Trends

Topic 1:
The Basis for
Technology as
Investment
Technology 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

Topic:

Determine the Value

n You must first understand if it is valuable
n 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 Corporations
n 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/NGOs
n 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 skills
n 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
Investment Using
Understanding Technology
Common Valuation Techniques

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
Strategy
n 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

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.

Topic:

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

Topic:

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

Topic:

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

Topic:

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

Topic:

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

Topic:

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

Topic:

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.

Topic:

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

Topic:

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
Lesson 2: Valuing Technology
Techniques

Topic:

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)

Topic:

From The Economic Benefits of Enterprise Architecture, Jaap Schekkerman

Topic:

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

Topic:

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

Topic:

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

Topic:

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 levels
n None
n Repeatable
n

Topic:

Maturity Categories

Engagement Shareholder Shareholder Technology Technology
Investment Value Costs Value
Architect Shareholder Level of shareholder Cost of The calculation,
interaction with awareness and value created. maintenance and amounts and
enterprise. active investment in new development reporting of
Specialization and technology as a including all technology
activity adoption. profit center. elements related contribution to
to Technology shareholder value.
Value.

Project & Strategy Partner Org Governance
Program Integration Ecosystem Satisfaction
Success
The methodology The amount of The amount and type Organizational The ongoing
by which projects inclusion of of inclusion in awareness and management of
are measured for architecture and IT technology in rating of execution against
success and the in strategy planning partner value and technology strategic goals.
relationship to and delivery. integration. support of
technology value. business
objectives and
direct support of
their roles.

Topic 3:
Calculating
Business Risk
Lesson 3: Preparing for
Investment Prioritization

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

Topic:
Basic 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

Topic:

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

Topic:

n Uncertainty is a fact of life!
n Systematically identify things
that could go wrong on the
project
n Use a formal process to
determine the potential
negative effects of each risk
and a strategy for mitigation

Topic:

Topic:

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

Protecting your IT investments "How you Invest In Technology May Change Your Business"

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