Gain higher returns, lower risks

But even as it opens the door to new business opportunities, IT also invites new risks. IT projects with a high degree of risk traditionally have an increased potential for failure, so executives must ensure these projects also provide a potentially greater return.

To provide effective oversight over IT, boards of directors and senior management should gain assurance that appropriate value is attained from the IT systems that are implemented in their organizations.

IT governance involves ensuring IT investments are selected wisely and are monitored and managed throughout their life cycle. Although it seems easy to quantify and monitor what an organization spends on IT, it is a difficult task to ascertain the actual value IT delivers to a business.

In nearly all organizations, the demand for IT-related products and services far exceeds the human and financial resources available. Therefore, critical decisions that can directly impact the ongoing success of an organization must be made regarding which projects are selected for implementation and which are denied or postponed.

It has also become clear that an IT investment portfolio needs the same active management as does a traditional equity investment portfolio. Executives need to establish a consistent method of assessing IT investments and determining which present the greatest value, based on concrete business needs and free of political or personal influence.

In the book "Optimising Value Creation From IT Investments", the IT Governance Institute (ITGI) outlines the key components of an effective IT investment approval process. These include:

• Prepare a comprehensive business case based on a consistent corporate standard and agreed-upon assumptions (e.g. tax rates and inflation rates).
• Establish an approval board or committee with appropriate representation from business and IT areas. This ensures decisions are made with neutral bias and with proper transparency of all business case components, including strategic alignment and financial returns.
• Consider key financial metrics on the proposed return from the candidate investments, including key indicators such as net present value (NPV), internal rate of return and payback period.
• Provide for proper accountability for the delivery of results. If the corporate culture is such that there is no real accountability (e.g. there is no impact on personal bonuses and other incentives), it is probable that no one will take seriously the requirement for accurate and reliable financial metrics. A reliable process is needed to measure the actual returns that are achieved from each investment.
• Define appropriate hurdle rates for IT investments. Just as hurdle rates are used in financial services sectors to determine the expected ROI at different levels of risk, they can be applied to IT to ensure consistent rules are applied for measuring and comparing expected ROI for IT.
• Assure that proper project management processes are followed, including the direct involvement of skilled resources to deliver and manage the project. A qualified and representative project governance board or committee should receive appropriate reporting on the evolving status of each project.
• Involve all areas of the business that will be affected by the project deliverables, and ensure enough resources are committed to maximize the opportunity of success.
• Understand the potential impact on the value return from each investment based on previous experiences with solutions delivery. For example, if IT-related business investments consistently overrun their original budgets by 20 percent, a 20 percent overrun should be factored into the expected return for each business case.

Every proposed IT-related business investment should have a comprehensive business case containing clearly articulated expectations and business benefits.

Tracking actual benefits achieved from IT-related business solutions helps increase strategic thinking and accountability by enabling executives to understand the extent to which each investment has paid off.

Maximizing the value achieved from IT-related investments is a continual journey that requires strong discipline, planning and oversight. As with any facet of corporate governance, the commitment and demonstrable support of executive leadership will help all organizations achieve greater value from all significant investments.

Paul Williams is an independent consultant in IT governance, IT due diligence, IT audit and project risk management, and is strategy director for SeaQuation, a spin out company from ING specializing in intelligent IT portfolio analysis. He was also the international president of the Information Systems Audit and Control Association (ISACA) and its affiliate, the IT Governance Institute (ITGI).