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Timing Your Business Case with the Technology Valuation Lifecycle - page 8 / 8

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SIDEBAR: Valuation Shifts

The turn of the century was filled with optimism for the impact of technology to disrupt industries and topple large vertically integrated companies. Fear of obsolescence drove many companies

to adopt technologies psychodemographic shift

that were occurred in

too

immature

for

their

culture

and

operations.

A

which Pragmatists became Visionaries and Conservatives

became Pragmatists. Technology acting as Visionaries attempted consideration of risks and costs of

purchasing occurred under the wrong to acquire productivity technologies operational deployment under a TCO

metrics. Pragmatists under ROI, without model. Conservative

asset-based companies lost the discipline of commodity procurement and bought a premium without consideration of how rapidly they would depreciate in value.

technologies

at

Today, in over-reaction to the bubble, the opposite has occurred typified by Silicon Valley’s shift from ROI to TCO. Innovators are building business cases. Visionaries are attempting to become Pragmatic, and judging change agent technologies not for their potential strategic impact but for their operational effectiveness. Pragmatists are purchasing proven commodities that provide plug and play benefits. Conservatives, well, aren’t purchasing much of anything.

Metric Limitations

Valuation metrics are a trade-off between complexity of determining which inputs are

simplicity for ease of

credible

factors.

The

use most

valuation metric isn’t the output, but the process of metric selection, assumptions, and the assessment of risk. Ideally this process occurs with the buyer and seller) to develop a shared understanding of risk and reward.

and comparison valuable aspect

study of inputs all stakeholders

and of a and (e.g.

Additionally, there is one major drawback to these valuation metrics: how they account for the

non-linear nature of technology deployment.

Technology investment and deployment is, by nature, non-linear

. NPV-based metrics such as

ROI and ROA assume a linear project state with little uncertainty in which there are no milestones that allow new decisions. In reality, investment can be incremental and milestones produce new information to assess risk and opportunity. Real Options Valuation (ROV) theory provides a mechanism to value alternative branches of a decision tree by valuing each decision as an option. However, the complexity of this approach and the financial acumen required has not yielded significant adoption. For the Late Majority, their asset-based business models and focus on the efficiencies of commoditization compels them to consider this approach. Alongside ROA, ROV provides a more complete picture of the risks and opportunities of a technology initiative over time.

Conclusion

At the company level, the Technology Valuation Lifecycle is a framework for determining the appropriate metric for a technology purchase or project for a given company based upon their

perception of technology risk. When estimating ROI, companies should consider the 5

Drivers.

When

estimating

TCO,

companies

should

consider

the

Whole

Cost

Model.

Value When

estimating ROA, companies should Technology Valuation Lifecycle is also technology’s benefits in the economy.

consider the Competitive/Capacity a useful lens to view the larger shifts

Advantage. The in attitude towards

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