Timing Your Business Case with the Technology Valuation Lifecycle
By Ross Mayfield1
Buyers and Sellers of technology have renewed their focus on valuation metrics such as Return on Investment (ROI), Total Cost of Ownership (TCO) and Return on Assets (ROA). There has been a marked shift from using ROI to TCO for the bulk of technology companies. Today’s focus on cost cutting, however, only explains part of this shift. Customers demand business cases using different metrics at different times depending upon their aversion to technology risk and the business cycle. This article introduces a new framework, the Technology Valuation Lifecycle, for understanding when and why valuation metrics should be applied. The 5 Value Drivers for ROI, the Whole Cost Model for TCO and the Competitive/Capacity Advantage for ROA reveal key considerations for metric inputs. The article also highlights key business cycle considerations for valuation metrics and the drawbacks of metrics in developing a business case of technology purchase.
Today’s “realist” economy value is more important than ever. Fortune 1000 companies continue to delay incremental investments in technology and human capital in pursuit of lean operations. Purchasing approval has shifted from the CIO or business unit leader to the CFO. Current lore demands that if a purchase or project is not one of the top three priorities as ranked by a valuation metric (ROI, TCO, ROA, etc.) and strategic importance, it’s dead in the water.
Most recently, there has been a significant shift from using ROI to TCO to justify technology
purchasing. TCO has technology procurement.
been around Although the
for a long time as an internal metric, but less so for economy has squarely put a focus on cost, this alone fails
to explain provide a time.
the shift. Taken together, the Technology Adoption better understanding for what valuation metric should
Lifecycle and the business support a business case at
Valuation metrics and methodologies play an important role in benchmarking and forecasting the economic value a technology product or project could generate. However, valuation methods are only useful if applied to the right problem with the right data. A February 2001 survey2 by CIO Magazine found that 86% found measuring IT value an important or extremely important priority, while only 10% feel that value measures are very or completely reliable. 41% use ROI, 29% use TCO, 14% use IRR, and 8.2% use ROA.
Three primary valuation metrics should be considered to support a business case at different times: ROI, TCO and ROA. IIR can be considered a subset of ROI. What differs with these three metrics is how they contextualize the investment to assess technology risk. ROI calculates the expected financial return, discounted for the risk of achieving the return, of deploying IT relative to the direct costs of the technology and its deployment. TCO contextualizes the benefits within the cost of the technology within business operations by assessing the direct and indirect costs that
create operational expenses. company, or capital expenses
ROA contextualizes the benefits within the asset base of the
The Technology Adoption Lifecycle provides an adaptable and commonly understood framework for considering the timing of business cases. All companies exist within this probability
About the served as
Author: Ross Mayfield is an entrepreneur VP of Marketing for a Fujitsu spinout.
and technology Previously he
marketing executive. was co-founder and
RateXchange Corporation (AMEX:RTX). He is a former advisor and speechwriter to the Office President of Estonia. He resides in Palo Alto, CA and can be reached at email@example.com
© 2002 Ross Mayfield. All Rights Reserved. Do not duplicate or distribute without permission. CIO Research Reports, Measuring IT Value, http://www2.cio.com/research/surveyreport.cfm?id=16