Capabilities Guidebook: Business Valuation

 

By: Board of Education

Description:

Business valuation of technology is the process of systematic assessment of tangible and intangible value anticipated and arising from investments in information technology. It is the capability of determining how and when to invest in particular technology directions and how to manage the overall portfolio of technology investments. Business valuation is used for proving financial benefit of architecture choices, by applying common techniques used for evaluation of all investments allocated to running an enterprise.

Business valuation of technology is measured and expressed in common economic parameters used by management for monitoring performance of resources allocated to the enterprise. Examples of these include financial parameters such as Return on Investment (ROI), Economic Value Add (EVA), shareholder value, revenue, margins and business metrics such as customer satisfaction, growth etc.

Overview:

Business valuation for technology is where the “rubber meets the road” in designing and aligning IT architecture, using available financial resources, with business strategy and prioritizing against competing business needs for resources. It drives the translation of an architect’s vision into pragmatic implementation choices such as selection of technology, standards and methodologies, implementation road map and prioritization of projects.

Architects have to participate in business valuation to assess economic and non-economic aspects of value delivered through technology. Business valuation of architecture is an on-going activity, generally triggered through one or more of these events:
•    Assessing investment required and justification for introducing, enhancing or replacing a technology solution to deliver business needs
•    Comparing return on investment between one or more technology options
•    Evaluating potential value of developments in technology
•    Measuring actual value delivered by an implemented solution

Architects will be required to provide valuation of their own defined solution as well validate valuations provided by other parties such as solution providers. As a growing number of enterprises prefer to buy or lease technology versus building in-house, architects should be able to fully evaluate the financial and business value proposition of a commercial off the shelf (COTS) or third party solution during a technology selection process.

Business evaluation of technology uses standard financial models that an architect needs to be able to use and understand. Developing a business case is a principle method of assessing all financial investments needed, quantifying benefits and validating that it yields a justifiable ROI. A business case provides an objective validation that a new technology implementation will yield desired returns stated in quantitative terms. Architects drive business valuation for new investments by assessing all costs of technology and projecting resulting benefits. Further for comparison within a standard framework, costs and benefits computed have to be classified into expenditure categories, with cash flows and budgets spread over the implementation timeline. Techniques such as Discounted Cash Flow or Net Present Value should be applied to ensure that future benefits are rationalized against present day financial indicators.

In addition to financial indicators, architects should also perform solution valuation using qualitative and quantitative business Key Performance Indicators (KPI). These KPIs can be extrapolated from a framework such as Balanced Score Card, the organization’s strategy measures or industry reference models.

Architects will have to re-visit the business case and revise if necessary based on feedback or change in requirements. Architects will also report on Key Performance Indicators that drive value. Similarly, as IT budgets are allocated and tracked, architects will be required to provide inputs or revisions depending on actual value realized.

Business valuation is a highly collaborative process requiring inputs from a cross-functional team including business stakeholders, IT architects, implementation teams and external technology suppliers. Architects play a lead role in identifying the technology components and business benefit parameters. Business valuation enables solution validation and technology life cycle planning by identifying all cost components upfront. It provides a financial framework through which technology initiatives can be evaluated and prioritized. Architects usually identify multiple cost benefit scenarios through changes in architecture design and technology.

Architects should have knowledge of all technology and implementation components and sub-components that will incur cost. This implies knowledge of understanding pricing strategies for hardware, software, infrastructure and services whether in-house or supplied by third party. Architects should also be familiar with financial valuation techniques that are commonly applied in the context of technology investments. The concept of Total Cost of Ownership (TCO) is used to capture all costs inclusive of implementing and operating a technology throughout its life cycle. Benefits from technology are usually a mix of well defined and anticipated outcomes. Anticipated assumptions are made with a degree of probability for less predictable scenarios. Amortization and depreciation is usually applied to software and hardware expenses respectively in which the expense is distributed into installments with the total value adjusted over time. With increasing costs and complexity of technology and technology skills, architects should also be familiar with IT charge-back techniques not least, because they involve valuation of the architects’ efforts towards the enterprise.

A key challenge for architects is treating business valuation as a required skill both within the architect organization and recognition of the same by business. Architects also have to work with partial information and conservative assumptions on business value. Another challenge is running architecture design through an iterative process and making pragmatic decisions especially on financial constraints.

Best Practices:

•    Understanding financial valuation techniques and having an institutionalized process for business valuation of technology.
•    Using/building tools for business valuation of IT.
•    Understanding separation between business case, budgeting, cash flow and balance sheet updating of technology investments and scope of architect’s concern in each area.
•    Documenting heavily in business case and measuring benefits post implementation.
•    Developing mulch-scenarios for business case.
•    Making pragmatic design choices based on financial constraints while also ensuring that architecture tenets are not compromised for short term or financial benefits only.
•    Avoiding valuation trap – excessive valuation leading to decision paralysis.

Sub Component Skills:

Financial Expression of Technology Decisions

Financial Expression of Technology Decisions is a process and a set of procedures used to estimate the economic value of an owner’s interest in an IT investment. It involves attributing monetary values using standard financial concepts to all components that make up a technology solution in its life cycle. Architects should be able to express costs of all resources required to implement and run a technology solution as well as resulting benefits in financial terms. Architects should be familiar with standard practices used for financial expression including investments, accounting, budgeting and reporting.

 

Iasa Certification Level Learning Objective
CITA Foundation - Learner will be able to classify parameters that make up TCO for a technology solution
- Learner will be able to describe ROI and Cost Benefit Analysis (CBA) parameters
CITA – Associate - Learner will be able to compute TCO of a technology solution
- Learner will be able to compute ROI and identify breakeven point
- Learner will be able to compare CBA for multiple technology options at a project level
- Learner will be able to explain standard pricing strategies for software, hardware, services and infrastructure
- Learner will be able to explain solution CBA for a project
CITA – Specialist - Learner will be able to create business case for a technology program with qualitative and quantitative assumptions
- Learner will be able to breakdown technology costs into capital and operating expenses
- Learner will be able to model multiple scenarios for ROI by varying parameters that drive costs and benefits
- Learner will be able to interpret pricing strategies for software, hardware, services and infrastructure
- Learner will be able to defend business case for a program
CITA – Professional - Learner will be able to lead business case for enterprise level solutions and complex multi-year, multi-generation technology road maps
- Learner will be able to decompose multi-year spend into cost allocation, cash flows and amortization/depreciation baselines
- Learner will be able to review and recommend pricing strategies for IP, software, hardware, services and infrastructure
 

Technology Pricing and Valuation

Technology pricing is the value charged for procurement of third party or in-house software, hardware, services and infrastructure to deliver and maintain a technology solution. Technology pricing is applied when licensing and leasing third party solutions and addresses efforts required to implement and operate the solution over its lifecycle. Technology valuation refers to the assessment of financial value of technology-based intellectual property (IP) in technology transfer or development of IP.

 

Iasa Certification Level Learning Objective
CITA Foundation - Learner will be able to identify attributes that drive pricing for software, hardware, services and infrastructure.
CITA – Associate - Learner will be able to explain standard pricing strategies for software, hardware, services and infrastructure.
- Learner will be able to identify and compare different pricing strategies.
- Learner will be able to identify solution attributes and business needs that influence pricing.
CITA – Specialist - Learner will be able to interpret pricing strategies for software, hardware, services and infrastructure.
- Learner will be able to identify optimal pricing strategies based on current and future business needs.
- Learner will be able to differentiate between pricing and valuation of IP.
CITA – Professional - Learner will be able to develop, review and recommend pricing strategies for IP, software, hardware, services and infrastructure.
- Learner will be able to develop and review valuation of technology pertaining to IP development and transfer or acquisition of IP.

 

Financial Management for IT

Financial Management for IT is the overall management, control and stewardship of the IT assets and resources used in the provision of IT services, including the identification of materials and energy costs. It is also included as one of the practices in ITIL framework for “Service Delivery”. Financial management or the “business of IT” covers three sub-processes – budgeting, IT accounting and chargebacks. Architects as creators of technology strategies and choices for an organization will provide related monetary inputs for budgeting and accounting. As a resource within IT, architects’ engagement with business may be driven by the chargeback process which attributes monetary value to an architect’s activities.

 

Iasa Certification Level Learning Objective
CITA Foundation - Learner will be able to describe architects involvement in Financial Management for IT
- Learner will be able to describe attributes of technology solution that should be measured and monitored under SLA
- Learner will be able to describe information needed for technology budgeting
CITA – Associate - Learner will be able to describe common methodologies for IT costing
- Learner will be able to prepare budgetary inputs for the life of a technology solution related to software, hardware, services and infrastructure
- Learner will be able to define standard metrics for attributes of technology solution that should be measured and monitored under SLA
- Learner will be able to estimate architect involvement in a technology initiative
CITA – Specialist - Learner will be able to apply organization methodology for IT costing
- Learner will be able to prepare budgetary inputs for the life of a technology program related to software, hardware, services and infrastructure
- Learner will be able to devise cost optimization opportunities in technology, asset, capacity and change management
-
CITA – Professional - Learner will be able to design technology strategies aligned to organization maturity and financial model for IT
- Learner will be able to design technology and architecture KPIs for financial management
- Learner will be able to define technology roadmap for continuous optimization of IT costs
 

 

Benefits Management is the process of monitoring for the emergence of anticipated benefits (typically specified as part of the business case for a project) and includes action to optimize the positive business impact of individual and combined benefits. Architects should continuously evaluate benefits – financial and non-financial, immediate and long term, direct and indirect, resulting from architecture solutions as a direct indicator of the value of architecture. Benefits should be tracked, measured and reported. Deviations from the projected outcomes, positive or negative should be analyzed and implemented into architecture.  

 

Iasa Certification Level Learning Objective
CITA  Foundation - Learner will be able to describe common attributes of business and technology benefits
- Learner will be able to measure benefits related to cost savings
CITA – Associate - Learner will be able to track direct business benefits arising from a technology solution
- Learner will be able to classify benefits and value additions
CITA – Specialist - Learner will be able to identify business benefits that are aligned to the business KPIs
- Learner will be able to track benefits and compare actual versus planned benefits
- Learner will be able to analyze deviations from projected benefits
- Learner will be able to explain co-relation between architecture and business benefits
CITA – Professional - Learner will be able to track benefits against enterprise KPIs
- Learner will be able to compare benefits of a solution with respect to industry benchmarks
- Learner will be able to measure direct and indirect benefits
- Learner will be able to perform benefit classification
- Learner will be able to define architecture action to address deviations in planned versus actual benefits


Related Capabilities:

Business Fundamentals Investment Planning and Prioritization

Resources:

Definitions – IASA ITABoK Definitions, IASA – Business Technology Strategy Training
Books - IT Financial Management: The Business of IT By Robert Ryan, Tim Raducha-Grace

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