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A_hard_and_soft_look_at_IT_investments

A_hard_and_soft_look_at_IT_investments - INFORMATION...

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126 THE McKINSEY QUARTERLY 1998 NUMBER 1 INFORMATION TECHNOLOGY/SYSTEMS It’s getting tougher and tougher to calculate costs and estimate benefits No methodology can substitute for judgment A new approach: total value of ownership A HARD AND SOFT LOOK AT IT INVESTMENTS Jed Dempsey, Robert E. Dvorak, Endre Holen, David Mark, and William F. Meehan III ROBERT HARDING
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THE McKINSEY QUARTERLY 1998 NUMBER 1 127 T HROWING GOOD MONEY AFTER BAD would make any manager uneasy. But then, uneasiness could be a good thing where IT investments are concerned. Few senior executives understand why their investments in IT have gone wrong or how to get them right in the future, according to recent interviews.* One reason for their bewilderment may be that it’s diƒficult to calculate the absolute value of information technology to an organization. IT is simply too integrated into most businesses to be isolatable as a variable. And rare is the senior executive who possesses the knowledge and experience to make IT decisions confidently. Many end up delegating fundamental decisions about their business to IT and financial staƒf. All too oƒten, the result is complex Jed Dempsey is a consultant and Bob Dvorak and Bill Meehan are directors in McKinsey’s San Francisco office; Endre Holen is a principal in the Pacific Northwest office; and David Mark is a principal in the Silicon Valley office. Copyright © 1998 McKinsey & Company. All rights reserved. * Industry interviews by Microsoƒt and McKinsey.
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legacy systems, proliferating distributed technologies, and lax development discipline.* We believe IT decisions must be made like other business decisions: on the basis of value. This means that the “soƒter,” more qualitative benefits that IT can bring must be evaluated and properly factored in. Costs are not the whole story, even when they are projected over the entire life of an investment. Rather, managers need to understand the total value of ownership that an IT investment may represent. Such an understanding can be developed through a traditional cost/benefit methodology that is customized to address the issues unique to IT decisions. Another prerequisite is the active participation of line managers. No meth- odology can compensate for managers who shy away from making decisions. Fortunately, the key issues in IT aren’t technical, but managerial. Making good IT decisions is something that all executives can do, provided they use a sound evaluation methodology and take the trouble to develop their business and IT judgment. Decision-making challenges Once, figuring out the cost of an IT investment was easy. The cost of a new application, for instance, was just the extra mainframe and disk capacity re- quired, some developer time, and maybe some soƒtware licences. The price tag might be bigger than you would have liked, but at least you knew what it was.
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