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 roadmap 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 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. Enterprise architects and senior architects usually drive business case development towards assessing a solution investment in collaboration with business and investment sponsors. 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 chargeback 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.