(taken from the Mar/Apr 2006 issue of On Balance magazine)

Justifying the value of
your IT purchase
By Les Tarjan, CPA
 

Under increasing pressure to do more with less, companies today must justify every expenditure for its business value. Given the current state of the economy, this is understandable. IT departments are no exception to the rule and must justify technology expenditures as part of any new IT initiative. By starting your technology justification process with a well-thought-out strategic plan, you can approach the approval and funding of projects with more confidence and improve your chances of success.

According to a survey of more than 250 technology decision-makers, over 70 percent indicated they now need to complete an ROI analysis before making IT purchases. Another 52 percent require a total cost of ownership (TCO) analysis.

TCO is a model that helps management understand the direct and indirect costs associated with owning and using information technology hardware and software. This model provides a way to account for all the “little costs” that go into acquiring, installing and managing computers, networks and applications. It also includes the costs involved in operating networks and computers, whether leased or owned.

Evaluating value
Investing in the latest technology can help your organization operate more efficiently and with less risk, allow you to pursue new business opportunities, and create new revenue streams. When evaluating the business value of new technology expenditures, consider the following:

• What costs can be avoided? (Overtime, equipment upgrades, downtime, turnover)
• What costs can be displaced? (Head count, labor, maintenance)
• Where will there be increases? (Revenue, market share, customer satisfaction, productivity)

Other important factors to consider include:

Upgrading and replacing technology. The recommended life span for computers is five years. Software becomes obsolete even faster. The ongoing need for upgrade, repair and replacement should also be taken into account.

Securing financial resources. Is your organization prepared to make a long-term commitment to technology? Ideally, a steady source of funding should cover current, future and ongoing costs. In practice, however, funding often fluctuates.

Implementing the plan. In the planning, decision-making and implementation process, enlisting the support of the entire organization can ensure success. A technology committee with representation from all major stakeholders should formulate a detailed, written analysis and plan.  Technology decision-makers, especially champions of change, should communicate with all participants during every phase of planning and implementation. After the new technology is installed, thorough training on new systems and procedures will ensure a smooth transition.

“Soft” measures also play an important role in guiding your company’s technology buying decisions. Intangibles such as strategy execution, management buy-in, and innovation should all be taken into account. 

Presenting a case
The support of the highest levels of your organization is essential in receiving approval for technology expenditures. Once you have evaluated the business value of the proposed technology expenditure, you will need to build a case to justify that purchase. To help make your case, develop a written plan that includes the following:

1.   A summary briefly explaining the business need, the recommended solution, and the estimated timeline for the deployment project. If it is known, include the potential price (in terms of dollars or hours) for the deployment project, as well.

2.   A detailed description of the business need. Take the time to outline all of the contributing factors, including any costs avoided, reduced, or potential profits gained.

3.   A detailed description of the proposed solutions. Aim to present at least three: one that is a minimal response coming in under budget but just barely meeting the criteria (or missing several), one that meets as many of the criteria as possible with the budget, and one no more than 10 percent over the projected budget.

4.   An appendix containing any vendor-specific information, if available.

There's no doubt that making effective and efficient technology purchases requires a long-term outlook, as well as the input and insight of key stakeholders. Using tangible metrics, your organization can determine whether an investment in technology will positively impact your bottom line. The good news is that the rate of returns on technology expenditures is often phenomenal.

Les Tarjan, CPA is a shareholder with Kolb+Co. Technology Advisers, LLC, an affiliated advisory firm of Kolb+Co. SC. His e-mail address is: ltarjan@KolbCo.com.

 

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