IT Economics for Business - II

Real Options Valuation (ROV):
A complex technique than TCO, ROI and EVA. It is based on the financial estimation techniques used in stock options theory. ROV is used to modify the ROI calculation by considering the value that the current project could contribute to future projects. This approach typically enhances the ROI of projects such as IT infrastructure. The cost of implementing a whole new infrastructure for just one project for one business unit’s needs is so burdensome that no one business unit could ever justify starting the new infrastructure. However, the overall value of the new infrastructure to all the business units in the organization could be huge. ROV provides a technique for justifying that first project based on the future derived value.

Return on Assets (ROA):
A popular measure for the performance of companies, ROA can also be applied specifically to IT assets.ROA for IT assets can be calculated by isolating the IT-specific assets from the organisational assets and the net income due to IT assets from the overall net income. This can be hard to do, and the accounting systems need to be set up appropriately to provide any chance of achieving this on a repeatable basis. ROA approach has deeper implications than might be immediately obvious.

 Return on Infrastructure Employed (ROIE):
 ROIE is similar to ROA, but it focuses on IT services rather than IT assets. With ROIE, IT service cost (including depreciation) is the basis for computing a return. While ROIE can be used for a single project, it works best when calculated for aggregations of projects. For example, it might be used to compare the performance of different in-house or outsourced IT Providers. ROIE might be improved by providing the same IT service at a lower cost or by containing the cost growth of providing a particular IT service to less than the rate at which the organisation’s net income is growing.

Part 1 is here

Source/Credit: The Business Value of IT


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