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an automated fax solution for an office. The solution has a project cost (hard-
ware, software, personnel resource cost) and an ongoing cost (software and
hardware maintenance and support). The solution also provides financial ben-
efits. It replaces a mail room employee. It provides an income stream through
cost recovery (net of what was previously charged, if any). Comparing the
costs involved with the costs saved and potential income and factoring in the
potential that e-mail is replacing faxing (this requires an assumption as to
452 The Back Office: Efficient Firm Operations

the replacement rate), the firm can calculate whether this project will make
or cost them money. This is a financial analysis.
Some businesses apply various financial measures. Some apply a payback
period analysis where there is a set time frame within which a project must
show a net positive for project approval. Some businesses apply a net present
value approach, which requires a calculation of potential income stream in
the future and potential costs in the future. If the project has a net positive
present value, it is more likely to be approved by the firm. While this dis-
tinction is interesting from a theoretical point of view and may be a good way
to set thresholds in other industries, a professional service firm likely uses a
simpler calculation by just determining whether the project has a net posi-
tive or negative cash f low.
While a financial analysis should be conducted where appropriate, nonfi-
nancial considerations normally play a major role in justifying projects. For
example, the payback on a knowledge management application is typically
long and would likely have a net negative value. In this case, these types
of projects would never be approved if qualitative improvements were to be
made. One argument for a knowledge management system is that it will re-
duce the time to prepare work product and improve the quality of that work
product. Since law firms sell time, billable hours, adopting such a system
would reduce the number of billable hours sold while keeping the same num-
ber of production use (the producers) lawyers. Therefore, from both a net
present value and a payback rule perspective, a knowledge management sys-
tem would not be appropriate.
Another issue with financial analyses is making valid assumptions. If you
include cost of funds or a discount rate, how do you select them? A small
change in that rate can change the financial viability of the project. In our pre-
vious fax example, if you assume a rate that e-mail is replacing faxing, how do
you determine the correct rate to apply? If you have a way to measure this his-
torically, for example, using manually recorded historical data available in
your accounting system (if you billed clients for your manual faxes), you likely
have some valid basis for such an assumption. Otherwise, consider ignoring
the variable in your actual financial analysis and noting it textually as part of
the overall justification. This avoids being seen as selecting values to make the
analysis work. (Remember the adage: “Figures don™t lie, but liars figure.”)
In short, use financial analyses when there is good solid financial data, but
don™t stretch to make such an analysis. When you do, present the numbers
you are confident with, and note the other factors in your textual discussion.
We refer to a third method for valuing projects as the “obscenity” method
after the U.S. Supreme Court™s Associate Justice Potter Stewart said,
“I can™t define obscenity but I know it when I see it.” 7 Many partners look
at projects and have an intuitive belief as to whether the project is justi-
fied. The problem here is that partners™ intuition may not validly ref lect
453
Information Technology

the true value of the potential benefits. Since there is no escaping this
approach, however, it is incumbent on the IT staff to provide sufficient
persuasive information to help the partner make an “informed” intuitive
decision.
An intuitive belief coupled with other methods for analysis is probably a
valid way of valuing projects. It should not, however, be the only way. Intu-
ition only goes so far. It ignores nuances that the person appointing intuition
might not be aware. It is not a rigorous analysis.
Another method that is often argued, but should seldom be persuasive, is
“loss of productivity.” The argument goes something like this: It takes a typ-
ical lawyer six minutes each day clearing the spam from his or her inbox. We
have 1,000 lawyers. Therefore, we are spending 6,000 minutes (100 hours)
each day clearing spam. Our average billable rate is $300 per hour. There-
fore, we are spending $30,000 each day clearing spam. With 250 business
days each year, we would make $7.5 million each year by implementing an ef-
fective spam protection. Nuts.
The problem with this analysis is that while apparently logical, it ignores
real life. To make this type of claim, a firm must analyze objectively actual
patterns. The presumption in this argument is that if you get rid of spam
completely from the environment, each attorney will bill six minutes more
each day and the firm will make $30,000 additional revenue for each day. If
an IT staff argues this position, it should be graded on its ability to increase
the firm™s bottom line by that amount.
We have seen the same arguments used to support redundancy and high
availability systems. “If the network is down for a day, we would lose a zillion
dollars.” Is that a fact? There are, unfortunately, ways to accurately measure
these claims. Every enterprise has suffered a major casualty where systems
are unavailable for long periods of time, perhaps even a full day. Find one of
these days and analyze the effect on the hours worked on client billable mat-
ters, compared with that normally worked on an average day. Compare not
only the day of the casualty but also the week starting with the casualty.
Were any hours missed on the first day made up on later days? Only after
conducting this type of analysis can a true loss of productively claim com-
prise a business justification.
Perhaps the best way to approach return on investment is by deploying a
real option strategy. The best way to describe real options is to think of
a poker game. You sit down at the table and ante one dollar for the option of
receiving your first cards. For that dollar you receive two “hole” cards and
one card face up. You are in the game, but you™re not required to stay in the
game. If based on what you know (i.e., on your cards as compared to the other
cards showing), you decide that you are in a favorable position, you can par-
ticipate in the betting for that round and buy an option to proceed to the next
round. If, however, you conclude that you are not favorably situated, you have
454 The Back Office: Efficient Firm Operations

the option to drop out. You™ve lost your one dollar, but you have not obligated
yourself to the bitter end on what now appears to be a losing proposition. The
game progresses with a series of options until you either opt to drop out, you
win, or you lose.
The lesson here is to approve and analyze the business justification of
projects in pieces. Put the riskier pieces upfront. When each piece is done,
analyze your business justification based on what you know then.
Each time we roll out a new system, we should set benchmarks for its ex-
pected use, and we should ensure we have a way to measure our actual usage
against those benchmarks. This should be included in and delivered by each
project. For example, if we decide that an online employee evaluation system
is valuable in that it would be used to create all evaluations, we should peri-
odically check to make sure that it is being used. This can be done by count-
ing the number of evaluations created or by comparing the people for whom
evaluations were created against the employee list. To the extent that the sys-
tem is not being used, we should contact management and develop manage-
ment reports to provide the required emphasis. Or, management may decide
to abandon the system.
As part of every project, we should establish metrics to ensure that the re-
turn on investment we anticipate is being attained.
As IT professionals, we should pride ourselves on undertaking projects
that provide good business value. We should not use business value to justify
our pet projects. To avoid this, we should implement best practices in arguing
this justification. Then, we should provide a way to objectively measure and
report on the system™s actual results against those justification arguments.
A project is a temporary effort to create a product or service. It is to be
distinguished from operations, which are regular and systematic efforts to
continue to provide products or services on an ongoing basis. While both
projects and operations need to be systematized, the way they are system-
atized differs. Operations are routine and often repetitive tasks. While proj-
ects have repetitive steps, how these steps are completed differs from
project to project and is not subject to formula. Nevertheless, there are best
practices to consider in managing projects.


Budget
I don™t care too much for money”for money can™t buy me love.
”the Beatles.

This topic presents a practical overview of IT budgeting and cost contain-
ment practices for the IT director. In creating the department budget, the
IT director must analyze a large number of variables and balance multiple
competing priorities, while devising the most cost-effective approach for
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Information Technology

delivering mission critical services. Because of the impact the budget has on
the IT managers ability to run an effective department, budget creation is
one of the most important jobs an IT manager has. Exhibit 17.7 displays the
amount of IT spending as a percentage of revenue by industry. As you can
see, professional services is high. Exhibit 17.8 illustrates IT spending per
employee. And finally Exhibit 17.9 shows the ratio of IT personnel to the
total company population. The previous three charts can help you determine
the approximate dollars you should be spending on IT.
To prepare for budgeting, collect in advance the following types of infor-
mation to help streamline and improve accuracy of the budget:

• Actual operating, capital, and budget variance figures from the previ-
ous year
• Initial statistics on employment growth or decline at the company
• Initial statistics on profit and sales expectations for the company for the
coming fiscal year
• Any changes to company operating policies




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