Value methodologies in corporate adoption and development strategy

Multiple Value Methodologies

Businesses competing in the information age can no longer be measured in the short run by the traditional financial accounting model. This model developed for the Increasingly, companies must use multiple valuation methodologies to appropriately assess their IT investments. Traditional quantitative measures help companies get a grip on hard dollar figures, but don't allow the integration of measures derived from strategy such as customer, internal business process, learning and growth perspectives (Phadnis). In the endeavor to incorporate strategy, qualitative methodologies complement quantitative methodologies to capture the whole picture.

Two very common quantitative valuation methodologies include Economic Value Added (EVA) and Total Cost of Ownership (TCO) (Mayor, 2002). EVA equals net operating profit minus appropriate capital charges. By assessing a charge for the use of capital, EVA encourages managers to monitor assets as well as income, and keeps them aware of the trade-offs between the two. EVA considers all investments, including initial cash outlays, maintenance, and internal and external training costs, and takes those as a charge against anticipated benefits such as increased revenue or reduced costs. TCO, on the other hand, takes a holistic view of IT costs across enterprise boundaries. Howerver, the use of only EVA and/or TCO is problematic because IT investments must also be evaluated along five value propositions (Isfahani, 2004):

Alignment of Business Strategy and Execution: Integration of executive guidance, line sponsorship and project-level execution to do the right work.

Planning and Executing effectively and efficiently: Standardization of workflows and automated business processes to do the right work faster.

Leveraging Resources (People, Partners, Money and Assets): Management of resources across the enterprise to use the right resources.

Making Global Teams More Productive: Sharing and reuse of information, work products and templates to do the work right.

Improving Visibility and Control: Organizational transparency for identification and solving problems early.

Qualitative measures such as Balanced Scorecard are helpful in capturing the intangibles that help to evaluate the above value propositions. Balanced Scorecard joins traditional finance lag indicators such as EVA and TCO with operational metrics and integrates them into a broader framework that accounts for things such as innovation and employee satisfaction (Mayor, 2002). All measures are placed in one of four groups: financial, customer satisfaction, internal processes and growth and learning. Managers then evaluate members of each group against the overall business strategy. Thus, it provides a systematic process to implement and obtain feedback about strategy (Phadnis).