IT Investing 101: Evaluating the Target

By Tim Barkow

As IT continues to align more closely with overall business goals, the importance of choosing the right products and projects is greater than ever. Making the right decisions requires extensive preparation and pre-purchase evaluation, such as pushing the boundaries of return on investment (ROI); understanding enterprise-wide strategic goals, risks, and weaknesses; and establishing a commitment to integrate ongoing measurement and evaluation processes to IT's general knowledge base.

Difficult decisions must be made about how and when to integrate new products into existing systems. New products may not merely improve performance, but engender a complete sea change in how an IT department thinks about and manages the technology infrastructure. But beware: while the benefits are enticing, the potential pitfalls can be many, as shoe maker Nike found out the hard way.

In 2000, Nike installed demand-planning software from i2, a supply-chain technology firm, in the hopes of improving sales forecasts. But the software was slow and buggy, and Nike's own employees weren't properly trained when the system went live. More important, Nike misinterpreted the role that the demand-planning software would play in its business model.

The problem wasn't with the software but with Nike's approach. Nike depends on tightly controlling its supply chain, taking retail orders far in advance, so in reality there wasn't much of a role for the new software's predictive algorithms. The misunderstanding cost the company $100 million in lost orders and triggered a 20 percent drop in its stock price. On the plus side, Nike quickly rebounded from this misadventure by refocusing its demand-planning process using a clear understanding of its business plan and goals.

If there's a lesson here, it is that smart companies must understand the importance of evaluating new investments and their effects. At the same time, organizations should realize that unexpected problems and failures may occur, and therefore they should prepare accordingly to prevent them. 

"The most sophisticated companies I work with develop a close partnership with their key vendors and understand the risks involved with their IT projects," explains Brad Spivack, Director North American Sales at Verari Systems, a leading provider of blade server clusters. "They develop specific mileposts and timelines to measure success and ensure that all parties -- the customer and key vendors -- understand their roles and responsibilities."

When beginning any evaluation of a potential investment, the first step is to screen products and services for their projected impact on business goals and performance. Next, detailed ROI calculations should be evaluated, detailing the costs, benefits, risks, and returns involved. Other metrics and analysis may also be included, such as the impact on current vendor relationships, the longevity of the investment, how well the investment advances strategic business goals, training needs, and what the expected adoption within the company will be, if applicable.

The most important factor in any investment analysis is risk. Understanding the effects of risk within the organization through the construction of various scenarios can help provide valuable insight into potential problems that can appear down the road. This allows teams to adjust timing, resource allocation, and other variables to improve the chances that the investment will be a success. CIOs need to pay sufficient attention to this point by considering the following steps:

• Understand the chance of success While organizations may inherently push for innovation, it is just as important to know one's limits. In many cases, a large project may have a better chance of success if broken up into smaller projects that still meet the majority of the original project's objectives.



• Embrace risk scenarios Compiling detailed and accurate risk assessments means digging deep into an organization's weaknesses. Scenario-building will not only increase awareness of potential problems down the road, but will provide clear metrics that can be used to evaluate a project's progress, when a project element is failing, and how to deal with that failure.



• Reconsider "sunk costs" There is a dangerous tendency in organizations to continue with investments that have outlived their usefulness simply because of the "sunk costs" already invested in them. Sometimes this is because of personal and professional attachments that arise on the part of individuals who maintain a fervent belief in the potential of a project. Other times, fear of professional accountability will keep an individual from vetoing a project. Detailed risk assessments can help temper these positions, allowing teams to evaluate projects and investments more clearly.



• Learn from past experience Effective knowledge management is probably one of the most important components in making sound IT investment decisions. Team members may change, so it's important that everyone has a clear understanding of the company's past successes and failures by keeping organizational histories. In addition, it's important to fine-tune the evaluation process itself. After every implementation, compile a list of additional steps that can improve the organization's evaluation process. Just as technologies change, so do organizations. Tracking changes in the organization's ability to evaluate potential investments and implement them will prove valuable when evaluating the next potential investment.

The increasing value of IT within an organization signals a commensurate increase in the need to understand the implications, however far-reaching, of new investments. Successful CIOs demand a more comprehensive investment evaluation process that includes a thorough risk assessment in the context of their organizations. It's unlikely that IT investment decision-making will ever get any easier, but being well prepared can ensure that unexpected developments are few and reactions to them are quick.

Tim Barkow has written about technology and business for Wired, Inc., and ESPN The Magazine. He is a freelance writer and consultant living in Portland, Oregon.