In the first part of this series I elaborated on a model suggested by Jeanne W. Ross and Cynthia M. Beath; focusing on the association between two dimensions: Technology Scope and Strategic Objectives. Technology Scope covered the investment spectrum between Shared Infrastructure and Business Solutions and Strategic Objectives covered the spectrum between Short Term Profitability and Long Term Profitability; resulting in four investment areas categorized as: Renewal, Transformation, Process Improvement and Experiments. The authors suggested that organizations need to make consciousness decision as to what portion of their investment allocation will be allocated to each of these categories and then evaluate any request for funds against that allocation.
Building Better Business Cases for IT Investments
Today’s literature review will provide an overview of an approach suggested by Professor John Ward, Professor Elizabeth Daniel and Professor Joe Peppard, in a paper titled “Building Better Business Cases for IT Investments” (the paper was originally submitted for publication to the California Management Review in September 2007, though I could not find the published article in the journal itself).
The focus of the paper is on establishing a method which will enable the organization to better understand the stated benefits expected from executing its IT investments. This focus is a result of evidence suggesting that many business cases either exaggerate the expected benefits or lacked elaboration on the business change required to have them realized (and see also “Bent Flyvbjerg’s Research on Cost Overruns in Transport Infrastructure Projects ” where it could be argued that the affected business cases could have also been ‘inflicted’ with over estimating the expected benefits).
The approach suggested in the paper is based on the following principles:
Different types of benefits are recognized – the focus is not solely on financial benefits
Measures are identified for all benefits, including subjective or qualitative benefits
Evidence is sought for the size or magnitude of the benefits included
A benefit owner is identified for each benefit – to ensure commitment and aid benefit delivery
Benefits are explicitly linked to both the IT and the business changes that are required to deliver them– this ensures a consideration of how the business case will be realized is also included
Owners are also identified for the business changes – in order to ensure they are completed and result in benefit delivery.
The paper suggests a multi-step approach to building an adequate business case:
1. Define Business Drivers and Investment objectives
Business Drivers refer to the issues and problems (internal and external) faced by the organization. Investment Objectives refer to what the proposed investment seeks to achieve. Determining and enumerating the Business Drivers provide an answer to the ‘Why’ we want to make this investment, while the articulation of the Investment Objectives provide and elaboration of ‘What’ would the proposed investment seek to resolve.
2. Identify Benefits, Measures and Owners
Having identified the Business Drivers and Investment Objectives “it is then necessary to identify the expected benefits that will arise if the objectives are met. Investment objectives and benefits differ in the following way: investment objectives are the overall goals or aims of the investment, which should be agreed by all relevant stakeholders. In contrast, benefits are advantages provided to specific groups or individuals as a result of meeting the overall objectives. Provided the benefits to different groups or individuals do not give rise to conflict, there is no need to agree them“.
Identifying the benefits, while important, must be supplemented by two additional activities. The first being a clear articulation of how the expected benefits could be measured and the second being naming the person that will be the owner of the benefit. The owner’s ‘job’ would be to provide a ‘value’ to the benefit and ensure there is a plan to have the benefit realized once the investment has been made.
3. Structure the Benefits
Benefits identified are required to under-go another level of categorization and classification along two specific dimensions:
1. Organizational changes enabling Benefits
Benefits can arise as a result of different types of business changes, classified by the authors as:
a. Do New Things – where the “organization, its staff or trading partners can do new things, or do things in new ways, that prior to this investment were not possible“; or
b. Do Things Better – where the “organization can improve the performance of activities it must continue to do“; or
c. Stop Doing Things – where the organization “stop doing things that are no longer needed to operate the business successfully“.
2. Degree of explicitness
The ‘Degree of explicitness’ refers to the degree to which a value assigned to the benefit could be substantiated (perhaps a better name could be ‘the level of substantiation’). The authors identify four level of ‘explicitness’ that could be ascribed to each benefit:
a. Observable benefits – “these are benefits which can only be measured by opinion or judgement. Such benefits are also often described as subjective, intangible or qualitative benefits“.
b. Measurable benefits – “these are defined as benefits where there is already an identified measure for the benefit or where one can be easily put in place“.
c. Quantifiable benefits – these are benefits “where an existing measure is in place or can be put in place relatively easy. However, in addition to being able to measure performance before the investment is made, the size or magnitude of the benefit can also be reliably estimated“.
d. Financial benefits – “these are benefits that can be expressed in financial terms. A benefit should only be placed in this [category] when sufficient evidence is available to show that the stated value is likely to be achieved“.
It will be easier to understand the way the two dimensions (Organization Changes and Degree of Explicitness) interact with each other by using a number of examples (taken from the paper – see there for the complete list):
4. Identify Costs and Risks
“In addition to the benefits, a full business case must obviously include all the costs and an assessment of the associated risks“.
The authors make the observation that “of all the aspects of business case development that differentiated the successful from the unsuccessful groups, evaluation and review of the benefits was where the differences were most pronounced. It would seem reasonable to suggest that the rigor with which an organization appraises the results of its IT investments will significantly affect the quality of the business cases on which investment decisions are made“.
Some final thoughts
The key message of the reviewed paper is that there is more to the Business Case than just being a vehicle for obtaining funding. Important as it may be, funds allocation is consequential and is secondary to the ability to clearly articulate, understand, manage and realize benefits. The paper allocate very little space to explaining how costs and risks are to be identified, assuming – I guess – that compared to the task of identifying and classifying the benefits, cost identification is relatively easy or, perhaps, not as important (in relative terms) to the task of identifying the benefits. Better understanding benefits would enable management to determine how much they will be willing to invest to realize those benefits.
Think about it!