In my last post, I talked about technology investments and the need to sell them to your company decision-makers in business terms rather than technology terms. Today, I want to give some examples of exactly what needs to be done to successfully procure capital to invest in longer-term and greater-yield technology investments.
IT folks often tell me “We don’t invest in anything in this company with a payback of more than six months.” Or “We don’t invest anything based on soft costs or benefits. We only take into account hard costs and hard benefits.”
No business limits investments to those with a six month payback, but I understand why executives would create such an impression among the rank and file. The goal is well-intended, keeping tactical investments within the annual budgets of the individual departments while directing longer-term, strategic investments to a capital investment committee. There’s nothing wrong with this approach, but the “promotion-earning” strategic investments are going to be longer term and require more complex ROI calculations.
In my recent “Dreaming of Disaster” post, I used the analogy of flipping a light switch to represent the idea of making a technology investment. Using this analogy makes it easier to understand why the probability of costs and benefits accruing is the central process by which one creates a business case for longer-term, strategic technology investments.
For example, walking up to the wall and flipping a switch results in an immediate hard benefit by reducing your electric bill by turning off the light. A hard cost on the other hand would be something like a $100 infrared light switch that could automatically turn off the light when a room is not in use. To calculate the ROI, you are comparing a hard cost (the $100 switch) to a hard benefit (the savings in electrical expense). We use the term “hard” because the probability of accurately predicting the dollar value of the cost or benefit is close to 100 percent. The more difficult it is to accurately identify the long-term cost or benefit, the more we would use the term “soft” to refer to them.
In the infrared switch example, if we knew a room was vacant for eight hours each night but the practice was to always leave the light on so that security cameras would be able to record the activity during that time, the benefit is easy to calculate. Furthermore, even if there was no requirement to leave the lights on for security and if we had no idea how many hours a day the room was left vacant with the lights on, we would still be dealing with a hard benefit, because we would merely need to study the traffic patterns in the room to solidify our assumptions.
Soft costs and benefits, on the other hand, result from the uncertainty about how, when and if a potential technology investment will directly impact cash flow. For example, turning on the lights to begin a new revenue-generating activity in a facility is typically “soft” because a lot of things have to happen correctly after the lights are turned on to generate profits—and these are things that are totally out of IT’s span of control. This does not mean that soft costs and benefits should be excluded from your business case, on the contrary, but you have to approach the calculation from a very different angle to successfully include these soft costs and benefits in your business case. I will tackle that issue in my next post.