IT Financial Value Metrics

Total Cost of Ownership (TCO) 

Although this is a cost-based approach which does not equate to value, it can be useful for measuring IT value because it allows comparison of alternative implementations that will meet the same business need and, presumably, have very similar values to the business. It is also true that by including such considerations as training costs, security costs, scalability costs, and the costs of reliability deficiencies, TCO incorporates perspectives that are not purely financial.  A limitation of TCO is that it involves predicting future costs. This limitation can be minimized over time by tracking actual costs but, by then, the investment decision has been made.

Return on Investment (ROI)

ROI means calculating the revenue that the business generates or the costs that it saves in return for the investment that it is making. For an IT investment to be approved by the business, the IT Providers and the business must work together to demonstrate that the business will get its money back with a nice profit in an acceptable period of time (the payback period). In practice, ROI is typically expressed as a percentage of the investment, either annually or over the duration of the project with the cash flows rendered as net present values.  A practical problem with ROI is that cost savings must be in real money rather than theoretical "efficiencies."

Economic Value Added (EVA)

The Economic Value Added approach starts with the assumption that the organization exists to provide economic value to its shareholders. This may not be entirely true for not-for-profit organizations but the approach still has value. The calculation and comparison of Economic Value Added is very similar to ROI except that the benchmark used for making investment decisions is not the IRR but the opportunity cost of using the money to make other business investments, (e.g., leaving the money in the bank rather than funding projects).

Real Options Valuation (ROV)

ROV is a more complex technique than the methods described so far. It is based upon the financial estimation techniques used in stock option theory. Without going into the detail of the mathematics, ROV is used to modify the ROI calculation by taking into account the value that the current project could contribute to future projects. This approach typically enhances the ROI of projects such as IT infrastructure where the cost of implementing a whole new infrastructure for just one project for one business unit's needs is so burdensome that no one business unit could ever justify starting the new infrastructure.

Return on Assets (ROA)

ROA is calculated by dividing the net income by the value of the assets being used to generate the net income. ROA for IT assets can be calculated by isolating the IT-specific assets from the organizational assets and the net income due to IT assets from the overall net income. This can be hard to do and the accounting systems need to be set up appropriately to provide any chance of achieving this on a repeatable basis.

Return on Infrastructure Employed (ROIE)

ROIE is similar to ROA but it focuses on IT services rather than IT assets. With ROIE, IT service cost (including depreciation) is the basis for computing a return. While ROIE can be used for a single project, it works best when calculated for aggregations of projects. For example, it might be used to compare the performance of different in-house or outsourced IT Providers. ROIE might be improved by providing the same IT service at a lower cost or by containing the cost growth of providing a particular IT service to less than the rate at which the organization's net income is growing.