Saturday, September 24, 2005

Using Economic Value Added (EVA) to justify IT investments

We've posted a new article posted on the Computer Economics website on the use of Economic Value Added (EVA) as a tool for justifying IT investments.

Linux adoption growing in corporate computing

Investments in information technology often involve major investments in capital. In fact, in some industries, IT accounts for over half of all capital expenditures. Therefore, if information systems executives want new systems to be approved, they need to understand how executive management expects large capital expenditures to be justified.

Historically, many IS organizations have not used formal ROI calculations to justify technology investments. There are two main reasons for this. First, in the past, business executives often did not ask for formal justification. It was often good enough for a CIO to quote one or two case histories, or to make general statements about industry best practices. During the run-up to Y2K in the late 1990s and the dot-com boom that followed shortly thereafter, many IT projects were approved with little financial justification at all.

The second reason is that, for many IT investments, the exact correlation between an IT investment and its benefits is not always explicit....

In spite of the difficulties in quantifying the benefits of IT investments, senior executives are now asking IS leaders much tougher questions about how a proposed technology investment will improve key business and financial metrics.

In order to answer such questions, CIOs must be able to “think like the CEO.” To that end, this article is intended to familiarize the reader with the way in which many large companies think about business performance and to show how it can be used to justify IT investments.
Read the whole article on the Computer Economics website.

1 comment:

David Foster said...

CIOs and other IT people need to stop thinking in terms of "justifying" projects. The term implies that one has already decided to do it and is looking for a socially-acceptable reason. (The *real* reason may be that someone needs this technology as a resume item)

EVA should be considered a tool for *evaluating* projects rather than a tool for *justifying* them.