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Cost of Investment - The Real McCOI

  • January 05 2006, 1:00am EST

At my job, we have endless discussions about whether or not new solutions will be worth their cost. These discussions seem to be particularly pertinent for IT solutions. How does one actually calculate the value of IT solutions, and what metrics should be used?

We have settled for the only financial metric for a business case that is actually used and understood by everyone, including our managers, namely cost of investment (COI). Why bother trying to figure out and then argue about possible return on investment (ROI)? It is difficult to do. Add to this that trying to calculate the intangible positive effects such as happier employees can be very difficult to do as these effects are certainly too - intangible.

Cost, on the other hand, is understandable to everyone, especially to the guys at the top who are completely disconnected from IT and other operational activities. For a new IT solution, for example, we simply ask our suppliers how much it (i.e., hardware, software and services) will cost. Then, based on our deep experience, we multiply this figure by 2.8 in order to get closer to the real not-so-underestimated cost. After this, we simply decide what is the least costly yet most sexy and prestigious solution. Sometimes, about every two years, when we feel the need to really show off, we decide to go for an enterprise-wide solution. In these instances, we do not mind that it is expensive. On the contrary, sometimes the more it costs, the better. This way we can also prove to our shareholders that we are truly investing in our future.

Yes, COI is the true financial metric for a business case. We have also noticed that it is used everywhere, but most people do not talk much about it. They probably pretend that it is such a business secret - or they are simply not aware that they too are using COI.

We always have discussions about COI when we want to implement new solutions, especially on the IT side. In the end, though, most will agree on what we should implement - all according to how much money our CEO or CFO will give the CIO to spend. However, on the midlevel management tier, there is often some whining about new solutions not being optimized for our activities, i.e., they cost too much and give too little return. If we were to listen to them, we would never get anywhere. Imagine if our top managers learned our operations in order to be able to discuss possible returns! Top management should focus on strategy, and every once in a while they will implement a new solution or method so that they can prove to the shareholders that they are working to fulfill the strategy. Never mind what the solution or method actually does and what the exact return might be.

Middle managers should not pretend that they understand expensive investments (heck, not even top managers do), and they should focus on doing what they are supposed to do with whatever means they have at their disposal. This is what they are paid to do.

How do we choose our solutions using COI? Well, as always, our relationships with the suppliers matter. They will often present nice, colorful information-rich PowerPoint presentations about their solutions. Some of them even talk about ROI - poor fools. Of course we listen, and sometimes we even ask questions about ROI. In the end, though, we do not care about ROI. It is all too superficial for our highly optimized (as we like to believe it is) and complicated business. ROI is only good when we need to convince our top management colleagues who think that the costs for the new solution are too high. And this proves that in the end, only COI matters as a financial metric for a business case as everyone thinks about the costs.

When the projects are really complex (i.e., eating up most of our nonexistent budget), we convince ourselves that we are doing the right thing with a few key expressions. They are:

  • Aligning Our Strategy. (This also allows us to stay vague on our strategy.)
  • Long-Term Investment. (This means that no results need to be positive in the near future, and everything will be forgotten in the far future.)
  • Corporate Activity Consolidation. (I have no clue what this one means.)
  • Optimizing Resource Performance. (We hope that things will basically be more comprehensible to us once the new solution is put in place).

Finally, in order to prove technically how COI works, we use the following formula:
COI = (Hardware + Software + Consultancy) * 2.8

We know that the coefficient for consultancy should be higher than for the rest, but it complicates things unnecessarily to take this into account and to separate consultancy from the rest. In any case, all the project implementations are more or less the same. At least, we do not differentiate when managing and running one from another.

As you can see, we certainly believe that cost of investment is The Real McCOI!

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