Technology Investment Modeling

“Comparing potential technology investments by measuring the increase in value they provide against the disruption caused by its implementation”

Concept Summary
The subjective desire to invest in the latest technologies out of a perceived notion that new is best or that competitors are doing the same can be costly and may not provide the optimal return. The subjective desire must be balanced with an objective view of the true cost and value an improvement would provide to an organization as well as the value an improvement would provide. Technology Investment Modeling is a tool by which managers can measure and evaluate the realistic return of potential technology investments. It evaluates the areas where value would be enhanced  by the investment against the disruption caused as a result of it’s implementation.
Investment in New Technology– Organizations have to invest in either upgrading or purchasing technologies in order to remain competitive in the marketplace.
Upgrades or Breakthrough Technologies – Organizations must be able to determine if a potential technology investment reflects an  incremental upgrade or a breakthrough. Leaders must be able to accurately gauge the realistic value of a proposed investment.
Ongoing Technology Development Risk –The risk that if an organization invests in a technology at a given moment, that at some point in the future a competing  organization will purchase a more current version putting the first at a competitive disadvantage.  This would require the first organization to either have to surrender some advantage or invest again.
Need to Remain Competitive – Organizations strive to remain competitive and this is reflected in both objective and subjective initiatives. In some cases this can lead to organizational irrationality.
Limited Resources– An organization has limited resources with which to invest in a wide range of possibilities, each with their own beneficial and disruptive elements.
Employee/Technology Evolutionary Limitations – Defined within the context of this tool as the limits of change an employee  can undergo and maintain productivity levels. Evolutionary limits are challenged by a lack of stability, reduction of morale, and/or the stress that accompanies frequent or rapid change. If these factors outweigh or overwhelm those evolutionary limitations, productivity levels may be negatively impacted.
The Situation
Technology continues to be developed at breakneck speed which allows organizations around the world to benefit from higher levels of productivity,  higher quality products, and more efficient services. Technological development in a number of industries has recently started to transition from breakthrough innovations to incremental improvements. There are several reasons for this transition that have been proposed by leaders and researchers. Perhaps the value of developing a new technology does not measure up to the return of  incremental upgrades. Perhaps there is a limit to what the market can accept without overwhelming their limits of adaptability.
The dilemma organizations face is when to upgrade. If an organization invests in a new technology today it is entirely possible that they will be at a disadvantage if their competitor were to invest in an upgraded version the following year. This leads to organizations utilizing upgrades as they are delivered just to stay on the leading edge, even if the benefits derived do not equate the cost of purchase and disruption caused as a result of those upgrades.
There are three primary considerations that should be considered when looking at making investments in technology. The first can seem relatively minor on the surface but it is actually the most difficult to gauge. Whenever a system or tool is modified or upgraded it requires a learning/training period during which effectiveness and productivity are at risk. I call this Disruptive Risk. The level and scope of the change increases this risk. The quality of the training program or change management team will further determine risk.
The actual financial cost of the investment is what is often the primary focus of decision makers. It is the easiest to understand and the easiest to communicate. Typically it does not realistically place value on the risks, discussed above, posed by this investment.
Finally where is the value seen with this proposed investment? What components of the new technology are going to provide value to the areas where it is being implemented? Can the real value be isolated and measured or is it a broad generalization of “it is new so it must be better”?
Does the increase in value equal or exceed the combined loss of value due to financial cost and disruptive risk? With management you see a sharp focus on cost and  perceived subjective benefits. The disruptive risk is downplayed or generalized as the inherent  price of change and progress.
            The challenge for leaders  in regards to today’s steadily increasing costs for technology is understanding the true value of potential investments and whether or not they should be pursued. It requires taking the eye off the competition and focusing inwardly as to how to best channel limited investment dollars to where they would provide the most value.
The Concept
Technology Investment Modeling makes use of a grid in order to measure and compare various potential technology investments. The grid utilizes color codes to represent value. Red indicates that the technology is too costly, and/or provides little value. Yellow represents a balance between investment and holding off on the investment. Green would indicate a potentially solid investment in terms of the cost of the investment and the value obtained from  it.
Cost includes the actual monetary cost of the investment and may or may not include delays, losses in productivity, training costs, etc which are indirect and collectively known as disruption.
The Value indicates what returns the investment will provide. It is important that you can quantitatively measure the value that is derived from a potential investment. Ensuring the values are realistic and not overstated is often a difficult aspect of measuring technology investments, especially if you are not overly familiar with the area being considered for investment. A CFO that comes from engineering may not be well suited for determining the true value of a new proposed HR system for example. HR in this example may be inclined to overstate the true value of the investment to the organization and the decision maker has to be able to gauge this and adjust the value accordingly.
Disruption can be represented a number of different ways. If the investment being considered can be considered disruptive to the extent they represent a significant portion of the cost then they should be represented in the choice of icon representing the investment on the grid. Significant disruption may come as the result of new IT systems, new POS systems, etc which would all require a good deal of adjustment by users in order to adopt them.
 If on the other hand if the disruption posed by a potential technology is insignificant then the level of disruption should also be indicated by the icon placed on the grid. If you have two technology investments on the grid and one is mildly disruptive while the other is not but both have the same cost and value then it may be best to invest where a lower disruption is noted. This may be incremental upgrades to existing systems, for example adding a function to a currently used software program. Since the software program is already in use the users would only be training in the new function and not the whole program.
 Technology Investment Modeling provides a basis for negotiation as well. You can use the information gathered above to either push the vendor to provide additional value or reduce the cost in order to move the system into an acceptable point on the grid at which investment would be justified. Being able to see multiple options in front of you on a competitive basis in the decision making process can be enormously beneficial to making higher value decisions.
1. List a technology upgrade or range of new technologies being considered for investment.
2. Determine the direct financial cost of each of the proposed technologies. In other words what is the monetary cost to the organization for each proposed investment?
3. Determine the cost of disruption for each of the proposed investments. These include the possible initial loss of productivity, the perception/morale cost, the management attention cost, etc. Attempt to break these down into common units for evaluation. For example loss of productivity could be measured as man-hours. Morale cost could be measured as an increase in employee turnover which would include added recruitment costs, new training, etc.
4. Determine the value of the proposed technology investments. Like the cost of disruption these are not always clear. You have to break down the benefits into units that can be quantitatively estimated and value those units accordingly. The total value represents true value.
5. Add the disruption cost to the monetary cost to determine True Cost. Now you should have two values. The True Cost and the True Value.
6. When comparing proposals place the first proposal on the grid in the center which should be yellow. On the basis of the values of the second proposal move the first proposal. For example if the true cost of the first is higher than the second then the first can remain as is or move up one notch.
7. When examining a single proposal estimate the budget you have available and use a that range to determine the Y axis of the grid. The value is a subjective range which the user determines to be fair and reasonable. This range of fair and reasonable can represent the middle column. Values that fall below can represent the first column while value that exceeds the range is represented in the third column.
8. Utilize the color grid to determine if a proposal warrants the investment.
      Luffy Notes
A. A simple comparative representation of various proposals can be an easy way to communicate suggestions to decision makers.
B. This tool can also be used for proposals that are not related to technology. You can even utilize the grid subjectively. For example you may wish to compare three different approaches to asking a manager for approval for a project you have been working on.
C. Always be ready to back up the grid placement with the assumptions made and the data collected. Ensure that which is subjective is converted to the objective as much as practicable. Use the grid as a tool to initiate discussions or debates. This may bring to the surface some of the hidden costs, or reveal values that were not measured before.

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