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Valuing Agility in IT

Every vendor offering you a cloud product touts their ability to provide agility to your IT organization. But, how do you place a value on agility in order to prioritize IT projects? There are a number of economic tools that come up frequently in describing value of software investments. I favor a simple economic approach: Net Present Value (NPV).

Net Present Value is the sum of value provided over time, discounted for the cost of money you’re investing in order to reap that value, e.g. interest. As an IT leader, you may not carry the cost of interest in your budget, but your Line of Business customers are likely affected by it and alignment makes for good partners. Let’s walk through an example.

Your one of your Lines of Business has asked you to build out an application which they predict will provide $5M in value to the firm, above and beyond costs, evenly over 60 months between deployment and replacement. You determine it will take 6 months to build the application, so the annual values to the firm by year :

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
$500,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $500,000

This $5M in value, when discounted to the current value (NPV @ 7% interest rate) has a present value of $3,966,078.83 .

Since money tomorrow is worth less than money today, if we can accelerate the development and start earning the value to firm sooner, we bring in more total value to the firm. Eliminating the startup development time completely gives us an upper bound on additional time value of $134,118.61.

Improvement in Delivery Speed (Months) Improvement in Delivery Speed (%) Year 1 Years 2-5 Year 6 NPV Value Created by Speed
0 0.00% $500,000 $1,000,000 $500,000.00 $3,966,078.83 $-
1 16.67% $583,333 $1,000,000 $416,667.00 $3,988,431.84 $22,353.01
2 33.33% $666,667 $1,000,000 $333,333.00 $4,010,785.12 $44,706.29
3 50.00% $750,000 $1,000,000 $250,000.00 $4,033,138.13 $67,059.30
4 66.67% $833,333 $1,000,000 $166,667.00 $4,055,491.14 $89,412.32
5 83.33% $916,667 $1,000,000 $83,333.00 $4,077,844.42 $111,765.60
6 100.00% $1,000,000 $1,000,000 $- $4,100,197.44 $134,118.61

Now we have an easy way to evaluate the business value of agility at the project level. Any combination of Cloud IaaS, PaaS, or SaaS that reduces the time required in rolling out a new project adds value.

For more on Net Present Value, see Wikipedia or look up the =NPV() function in OpenOffice or Excel. You are welcome to the calculations used in the example should you want to test out value of your own projects.

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