Technology on a tightrope.

• Author: Paulsen, Joseph
• Position: Information Management

Looking for value can radically improve technology investment decisions. These scenarios identify what value is, where to find it and how to structure a useful financial analysis.

In 1989, the Organization for Economic Cooperation and Development in Paris finally said what many in business were afraid to admit: "Information technology has so far failed to provide that major spur to economic growth normally associated with sweeping technological changes." Why isn't technology the savior we thought it would be? At least in part, it's because companies are using the wrong methods to evaluate technology economics. They undervalue the resources technology consumes and overestimate the benefits. So how do we better evaluate technology investment proposals?

Start by looking at the economic value, or what we get for what we give. And remember that the getting and giving aren't merely single point events. Rather, hard-nosed, rational investments increase the economic value of the firm over time.

Unfortunately, financial accounting theory and practice often obscure this economic viewpoint. While cost accounting, tax accounting, budgeting and forecasting, external reporting and investment analysis each meet specific information needs and satisfy differing management and public-policy interests, they also have limitations because of the assumptions they make. In fact, measuring technology costs and benefits with such inappropriate tools has led industry to waste billions of dollars.

But there's a solution: Clarify what needs to be measured, both costs and benefits. We can easily see most -- but not all -- of the ways costs are incurred through staff and the technology installed. However, benefits are often ignored, particularly those considered intangible. Finding the most economic value requires analytical adjustments. Here are some examples of problem investments and ideas on how to avoid the same predicaments.

TRACKING COSTS

First, let's took at some troublesome technology costing situations.

* Consider a project that starts as funded to an expected level for a defined period. As the deadline approaches, the project manager declares the project, which is incomplete, to be an "initial release." He then rolls over into a maintenance backlog all of the functionality that hasn't been delivered by the promised date, so the company can reprioritize it and fund it with operating-expense allocations as future releases.

The manager makes no attempt to connect this follow-on cost to the original investment authorization. In fact, he even adds an equipment upgrade in another capital project request. In effect, the company is asked to buy the investment over and over again.

* In this case, management never gets the full picture because the costs have been fragmented over time and across capital and expense accounts. Remember, any use of resources is a real economic cost, regardless of its accounting treatment. Resources have to be identified, measured and managed, regardless of when they're used. This means each technology component of the business is treated as an asset whose cost continues to accumulate over its life cycle. Any expenditure that has an impact on the usefulness of the technology adds to the asset cost base, regardless of the expense adjustments required for financial and tax reporting.

* Many managers justify technology projects by saying they incur zero costs: "The machines have excess capacity, and we would have the people regardless of this project." They believe users can do their current jobs and then attend design workshops, testing, training, conversion and startup...