by Douglas Hubbard

IT Pays to Consider Risk When Selecting IT Initiatives

Jul 15, 2001 2 mins
IT Leadership

Hygeia’s two-committee process may offer an important benefit by implementing a division of labor similar to that seen in various accounting functions. With this approach it would be difficult for any one person to adjust the numbers until he got the answer he wanted. A conspiracy of two or more individuals from different groups would have to occur to fabricate a particular ROI. It is certainly plausible that this process helps to encourage objectivity.

Unfortunately, while Hygeia’s committee solution does address certain estimating biases, it still feeds this information into a traditional ROI calculation, which is misleading no matter how good the estimates were. Most accounting-style ROI calculations ignore some of the most critical factors in IT investments because they appear to be intangible. Risk, information value and flexibility, for example, are often considered unquantifiable when in fact they have totally objective measures with provable economic valuations.

Computing the economic impact of risk is, in fact, the domain of Hygeia’s industry. Yet I’ve found insurance companies almost never use methods from actuarial science in IT assessments. I’ve even seen the IT departments at such companies treat risk as an intangible. But if Hygeia asked one of its actuaries to compute a true risk/return analysis of an IT investment, it might be surprised by the results. The actuary would surely find, as I have, that IT investments are relatively risky, and measuring that risk would have a profound effect on IT decisions.

To say that the committee solution is better than Hygeia’s previous method, it must be able to show that (1) the resulting decisions are different from what they would have been otherwise and (2) the economic results of these investments are better than they would have been. Yet most organizations with a new decision-making method can’t show this is the case. The perception that a new method is better than an old method is often only a placebo effect in that everyone feels better about it simply because they are doing something about it. Unfortunately, without a proper risk analysis, it is unlikely that the IT decisions are improved by very much.

In short, Hygeia has found a good solution to the organizational issues behind generating estimates, but I bet one of its own actuaries could teach the company something about what to do with those estimates.