How Intel Measures the Value of IT

When Intel spent $1.1 Billion on IT in 2005, it wanted to be sure it was getting value from its investment. It’s true that you can’t manage what you don’t measure. Any of a number of financial tools could help Intel determine the expected return, but IT executives wanted to measure the actual value delivered, on a going-forward basis.

Their first consideration was to pick a methodology that they could incorporate into their IT governance framework and IT portfolio management. As leaders who recognized early on that IT investments involve business change as well as technology, tangible and intangible results, Intel did not find a methodology that suited their needs. Instead, they found:

• Many of the methods were and still are today purely financial measures, such as return on investment (ROI), net present value (NPV), internal rate of return (IRR), and economic value added (EVA).

• They implied a precision that doesn’t exist, so despite their complex formulas and single-number results, they were in fact only as good as the assumptions they were based on.

• Many excluded a means to measure intangible benefits.

• They excluded future expansion opportunities.

• They failed to adequately address risk.

Intel decided to leverage the in-depth experience of their IT organization and develop their own valuation methodology. Among the better known valuation methodologies in play today, it is by far the most straight-forward and easiest for organizations new to IT valuation to incorporate into their practices and sustain over the long term.

The Business Value Index (BVI) methodology helps Intel prioritize investment options, leverage data for decision-making, and monitor valuation over the long term. Its reach extends beyond just financial measures in the following ways:

• “Business Value” measures both tangible and intangible benefits based on a set of weighted criteria that includes customer need, business and technical risk, strategic fit, revenue potential, and a quantification of innovation and learning generated.

• “IT Efficiency” measures its impact on the IT organization, how well it fits into IT’s architecture and standards or increases risk and cost because it falls outside known areas of expertise.

• “Financial Attractiveness” focuses entirely on financial aspects. Intel uses NPV, IRR and payback period together to create a well-rounded financial view.

• A project is scored in each of the three categories. The scores are then laid onto a cube diagram in a manner so that failure is in the bottom left boxes and projects that can both increase business value AND IT efficiency are in the top right boxes.

Intel has pushed several billions of dollars of IT investments through BVI since it was developed in 2002, and has significantly refined its use over the years. It is the simplest of the better known valuation methodologies and can easily be adopted by companies with no history of looking at IT Valuation. Check out a detailed white paper at Intel IT’s Web site. The full program can be found at Amazon in the book Managing Information Technology for Business Value, by Martin Curley. Here’s a link to it at Amazon.

If you’re curious about other methodologies, you might want to consider the following:

• Forrester’s own Total Economic Impact (TEI) methodology is similar to BVI and adds more rigor around intangible benefits, quantifying risk and the value of flexibility.

• ValIT complements COBIT for expanded IT governance and can easily be adopted by organizations already familiar with COBIT. It is a relatively new framework, however, and is currently focused only on new investments, although future releases will expand its scope to all IT services and assets.

• Applied Information Economics (AIE), a quantitatively rigorous method that perform a true risk/return analysis based on valid statistical methods and a high degree of confidence in the results. AIE incorporates elements of economics, operations research, modern portfolio theory, software metrics, game theory, actuarial science, and options theory. AIE is the only methodology in this list that is not organized around a business case.

If you choose to go down this route, the method you adopt is less important than your ability to apply it consistently and sustainable across all IT projects.