Economics of IT – A Question of Value

Does IT produce value? An interesting question but how do you define “value”? Webster defines value in the context of this blog as relative worth, utility, or importance for example “a good value at the price” or “the value of base stealing in baseball”. I especially like this second example, since it’s a good analogy for the value that IT produces within an organization.

In baseball, stealing a base increases the probability of scoring a run, which of course is the ultimate goal of the game. Within an organization in either the private or public sectors, IT increase the probability that mission, goals and objectives can be achieved with a minimum expenditure of resources. Like baseball, the distance between the runner and home plate is lessened, which means less is required to score. From second base a runner has a better probability of scoring on a single than he would have had from first base.

Like stealing a base, IT’s value is typically indirect and may or may not contribute to meeting an organizations goals. The value of stealing a base and not scoring is zero in terms of the score. In organizations, the value of IT is zero if it is not solving a problem or increasing the overall productivity of the organization.

There are numerous examples of failed ERP and CRM systems. Being late or costing more than expected are project failures. Not meeting user requirements and expectations go beyond being a project failure and are IT/System failures. If the system is never implemented, then the value of IT is negative and a waste of organizational resources. Being called out when stealing a base is often referred to as “losing a runner”, so the analogy still holds.

So what makes taking the risk of stealing a base worth the effort? It’s a close game and not a blowout, the value of scoring an additional run is high. This obvious translates directly to the competitive situation faced by an organization. It’s worth the risks of implementing new systems if they will help create a competitive differentiation or advantage.

The pitcher has a slow delivery, the catcher has a week arm and the probability of being successful in stealing the base is high. Our systems are old and outdated and the probability of successfully implementing new “state-of-the-art” technology is increased.

Our runner gets a great lead and has great speed. Probably the most critical factor in making the decision to steal a base and in IT probably the most important factor in determining the probability that IT adds value. The strength of our people!

It’s a fun thought and an interesting way of thinking about the value IT provides.

Economics of IT – Lowering the Cost of Doing Business

As an economist, I’ve always understood that the value of Information Technology is derived from its ability to lower the cost of doing business. This increase in productivity of the firm’s resources can lead to greater volume of business and profitability.

This reality has been clearly demonstrated in my current venture working with a very talented group of individuals introducing a new service to the marketplace. The company is located in Boston and I’m living in Richmond, Va. Here are some of the technologies we are using to communicate, collaborate and conduct day to day activities:

• Go to Meeting – For meetings with prospects and demonstrate our services,
• TurboMeeting – An alternative to Go to Meeting that we use internally,
• Glance – Another screen sharing program,
• Skype – Conference calls and texting,
• Internet – Essential communication vehicle,
• Microsoft Office 2010 & Open Office – Document creation & editing,
• ACT – Contact management & Reporting,
• Social Media – Twitter, Facebook & LinkedIn for networking,
• Blogging – Spreading the word, and
• Phone – Some technologies last forever.

These technologies let us operate the business in a new virtual domain and there are very few if any drawbacks or missing capabilities. It’s truly amazing the number of cool tools that are available to conduct a business today and the costs are nominal.

William A. Crowell
Asuret, Inc.

Economics of IT

I’m initiating this new blog on the Economics of IT because it’s an area that seems to need additional clarity and there is a plethora of material on which to comment or in today’s vernacular blog about.  It’s also an arena in which I feel quite comfortable having an undergraduate degree in economics, an MBA from a prestigious graduate school (UVA – Darden), and served in executive roles as a CIO, CFO and Deputy Assistant Secretary of the US Treasury.

So where to begin?    Let’s start with one of the latest fads in IT, Cloud Computing or for those of us old enough to remember “Time Sharing”.  One of the early entries into this arena was Ross Perot and Electronic Data Systems (EDS).  As the story goes, Ross was an IBM salesman and would make his quota in the first quarter of each year.  He realized that his customers had significantly greater computing capacity than they used and started selling time to other smaller companies.  As I remember, I think the first company to allow Perot to sell their excess capacity was Frito Lay in Dallas.

Eventually, Ross was making more selling time sharing services than selling IBM iron and thus evolved the creation of EDS.  So how does Cloud computing differ from selling time on an IBM mainframe.  First, the network doesn’t need to be hard wired to the customer who only needs ubiquitous Internet access.  Second the hardware is cheaper and more configurable and capacity can be easily shared using virtualization technologies.  Data Center facilities, power, redundancy, cooling, etc…; largely remain the same.

So what makes Cloud computing of interest today is the notion that it can reduce costs.  Meghan Stabler (@MeghanAtBMC) caught my attention with the following post on Twitter:

#Obama’s 2011 Budget Suggests Agencies Use #Cloud to Cut Costs http://bit.ly/9u8vND

I pointed out to Meghan in my reply that Cloud computing can’t on its own actually reduce the cost of computing in the long run but simply shifts the initial investment cost from the user to the service provider, who will recover this investment and generate a profit over the course of the contractual relationship.  If this were not true, then the cloud wouldn’t exist.  So if you compare the one year cost of the Cloud to the first year cost/investment of providing a similar service internally, it appears there is a substantial savings.  It would be similar to comparing the 1^st year cost of leasing a car to purchasing the car.  The first year cost of owning always far exceeds the first year cost of leasing.

Therefore, the economics of the cloud rests on the time honored reality that there are tremendous economies of scale in computing.  Whether or not this is in chip production, computers, storage, networks, etc… 

For gigantic organizations such as the Federal government these economies can be best achieved through consolidation of its 1,000′s of data centers and not necessarily from purchasing computing services commercially through the Cloud.  For smaller organizations, the Cloud can be used to shift the investment in computing infrastructure to the Cloud vendor and over the short term lower its computing costs.

My Recommendation:  If you want to determine if your cost of computing is lower using the Cloud compare the net present value of the cost of building your internal computing capability to the net present value of the cost of using the cloud over the expected life of the alternative direct investment.  Theoretically, they should be roughly the same.  Only if the Cloud computing vendor can achieve great productivity in the use of computing resources will there be a long term cost advantage.

William A. Crowell

Asuret, Inc.