Simulation model calculates business value of complex IT projects

What if you could assure a high probability that an IT project would really deliver business value, even years down the road? It sounds like the Holy Grail of IT management. But that's the promise of an IT financial model developed by Swedish automaker Volvo Group and consulting firm Arthur D. Little Inc.

The financial tool has the ungainly name of the "IT Solution Portfolio Management (ISPM) Model." It's intended for simulating the business benefits of big, complex IT projects, according to developers Olaf Tellefsen, an IT director within Volvo's CIO office, and Anders Johansson, head of Arthur D. Little's IT practice in the Nordic region.

The model starts with business objectives and targets (e.g., reduce the time it takes to do X) and the metrics or key performance indicators. The back half of the model is a simulation of the IT projects and multi-year roadmap to reach those business objectives.

The result? In a telephone interview from Sweden, Tellefsen and Johansson said the simulation shows which parts of the IT roadmap have a high likelihood of success in delivering business value (ROI) or a low likelihood of success. Specifically, it shows the probability of positive or negative NPV (net present value) in different scenarios, using Real Options Valuation.

(For more information, see this ADL/Volvo white paper.)

Volvo is using the model for all IT-related projects, Tellefsen says, and is starting to see some results. For one thing, "we're more precise in what we deliver," he says. "Our projects are better at delivering what the business needs."

The biggest effect of all is an intangible: Better conversations with the business decision-makers on the impact of IT. More clarity, less mystery. IT learns more about business goals and processes; the business learns more about the value of IT; and both sides get to see the bottom-line consequences of different IT decisions. Both sides will be speaking the same language.

An important feature of the model is the ability to play what-if games to simulate different IT roadmap decisions and see which one produces the most business value. You can also see the interaction among projects and subsets of projects, they say.

For example, the sequence of tasks or projects can be critical to whether a project works; i.e., some parts of a multi-faceted project need to happen before others to maximize the benefits. Tellefsen says the model shows dependencies and helps business decision-makers understand the consequences of different sequences; for example, is it better to phase out a legacy system now or five years later?

Johansson points out that it's "not a one-time simulation." When something changes (business needs, technology), you can run the simulation again.

In essence, the model is supposed to be used on a continuous basis, Johansson and Tellefsen say. It can even be used for projects already underway or in trouble. You can analyze a project to see what benefits it will really provide and what hoped-for benefits it won't provide, which will provide clues about how to move forward, they say.

Copyright © 2010 IDG Communications, Inc.

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