When CIO George Germann joined the Visiting Nurse Service (VNS) of New York in November 1997, the process for selecting and approving IT projects was simple and straightforward, much as the business itself was back then. “We had a project request process, but it was largely ad hoc,” Germann says. He and his staff would sift through requests, balance available resources, and then Germann would present a list of recommended projects to VNS CEO Carol Raphael for final approval. That process was effective when the VNS’s business was simpler, but as the agency grew in size and complexity, it was no longer sufficient.
Since then, the New York City-based home health-care agency has added new lines of business and new services, acquired other agencies, and coped with a flood of projects that were sidelined as the VNS prepared for the Y2K transition. “We’ve grown more rapidly in the last 10 years than [at any other time] in our 110-year history,” says Germann. The convergence of rapid growth, the skyrocketing level of project requests and the agency’s conscious decision to balance future technology initiatives against strategic objectives led Germann and his executive colleagues to impose a better mechanism for determining value and funding IT projects.
A New Method
Germann considered several established valuation methods, including Balanced Scorecard, total cost of ownership and a methodology developed by Gartner. But he decided that their cost and complexity did not suit the VNS’s current needs. So Germann incorporated elements from those methodologies into a customized method.
The primary benefit of formalizing a valuation methodology is to maximize the value of every IT dollar by avoiding costs and increasing productivity. “Our strategy is to take on more projects [but not to] increase our staff,” Germann says.
IT project proposals go through a rigorous three-stage process. First, the project sponsor completes a request form and submits it to IS. Next, the project sponsor works with the IS staff and members of the IS steering committee (a seven-member group set up as part of the new approach; it includes representatives from IS, finance, business development and operations) to refine the project benefits, costs and risk analysis. Then the steering committee and the CEO evaluate and recommend projects for approval and funding to the VNS board of directors on a monthly basis. Once the board authorizes a project, IS works with the project sponsors to develop a charter—a guideline for the IS team and the sponsors to ensure that they’ve allocated the necessary resources to deliver the project within the specified time and budget parameters.
The valuation of critical success factors, both financial and nonfinancial, is where the VNS fine-tunes the process for its requirements. For a project to be approved, it must provide value to the VNS in at least one of the following areas: improved quality of care, improved speed and reliability of business operations, reduced costs, increased revenue, improved decision support or reduced risk. To define clinical-project specifications, Germann relies on input from the clinical staff, which is led by Vice President of Operations Ingrid Jimenez, who is also a registered nurse. “From the clinical and operational side, we say, ’This will work,’ ’This won’t work,’ and ’What we would like is this,’” she says. “Then we look at how the systems will change our work processes.”
In determining a project’s relative value, Germann and the rest of the steering committee scrutinize the project’s economic value, its strategic fit, its effect on the quality of service and any regulatory compliance issues like those associated with the Health Insurance Portability and Accountability Act. To quantify those factors, project sponsors are required to assign a value score from zero to five, where a zero or one has minimal impact on the agency’s objectives, and a five has critical impact.
Risk assessment and analysis also come into play during the project approval process. Risk factors include the degree of process change involved, level of staff sponsorship and resource commitment, direct risk of the technology involved and the extent of project management and interdepartmental collaboration required. Projects are scored on a 30-point risk-level scale. For instance, high-risk projects are not approved until the risk is mitigated at least down to a moderate level by reducing the project scope or putting other strategies in place.
Once the steering committee members have thoroughly evaluated project requests, they generate an aggregate score (ranging from one to 100) for each project, factoring in the scores for economic impact, strategic fit, service value and compliance value. Project scores are plotted on a graph according to their value and risk scores. The value proposition, or how much value the project is determined to bring to the agency, is plotted along the X axis. The probability of project success, which incorporates all risk factors, is plotted along the Y axis. Those projects in the high-value, low-risk quadrant more easily receive a go-ahead. Those in the low-value, high-risk quadrant are often bounced back to the project sponsors.
One project that went back to the drawing board following its valuation was a proposal for installing a new time and labor tracking system that would automate the existing system. The VNS currently uses scan cards to capture payroll information. That project was evaluated as having a moderate to high risk, and given a value score of only 45 points, so it was rejected. The project sponsors are now revisiting the proposal and will likely present their plan again.
Consolidate and Save
Earlier this year, Germann and his colleagues, working with consultants from Forsythe Technology, applied their IT valuation methodology to reveal a significant cost avoidance by revising their strategy to steadily increase the VNS’s midrange computing capacity to keep pace with new application deployment. The 2002 budget included an upgrade of 10 to 12 RS/6000 servers over three years. These servers support systems such as the Visit Documentation System that runs on tablet computers that nurses use in the field; payroll and HR systems; a new budgeting system; and claims and remittance tracking systems required for HIPAA compliance and other agencywide systems. The total cost of ownership during a three-year period for these upgraded servers was $4.3 million, including equipment costs and depreciation, maintenance, IT support, even electric power and floor space required to operate and house the servers.
This approach, while necessary to support new systems, was costly and fragmented. When Germann reviewed the usage data for his server farm, he found a high percentage of unused capacity in several of the servers, which could not be readily shared by other applications. The existing infrastructure of nearly 30 application systems running on 13 servers also required additional IT staff to support them, higher software licensing costs and more facilities for storing the servers.
Germann calculated the total cost of upgrading servers and the cost of consolidating onto an IBM p690 Regatta server, and found the three-year total cost of ownership for the consolidation would be $2.5 million—more than $1.8 million less than the $4.3 million TCO for upgrading the 10 to 12 servers. Using the value methodology, Germann saw that apart from the hard-dollar cost avoidance the VNS would realize by consolidating on the p690, he would be able to configure multiple servers in a single platform to minimize unused capacity, keep pace with increased application storage needs and improve reliability and security.
Forcing staffers to validate and demonstrate their projects’ value helps them assume more ownership of projects. The valuation methodology has also made the operations side more involved throughout a project’s lifecycle. “People in operations now know that we are scrutinizing projects,” says Sam Heller, CFO of the VNS. “We’re looking not only at initial ROI, but down the road, whether the ROI that was projected actually occurred. People are becoming much more accountable and serious about the process.”
While ROI is important, it’s not the only issue. “ROI has high weight, but we would do a project that has high strategic value,” Heller says. “Sometimes we do projects even though the ROI is not very positive or if it’s hard to define.”
Besides ensuring the proper level of value for each IT project, another significant benefit of applying this valuation methodology is that it has fostered an increased level of understanding and alignment between the business and operations side and Germann’s IT group. “It isn’t simply IS making arbitrary decisions about which projects get funded and which don’t,” Germann says.
Heller agrees that the valuation process has helped both business and IT see each other’s point of view. “It has given operations some insight into how IS makes decisions and what their issues are,” he says.
Tweaks And Refinements
The VNS has been using and refining its valuation methodology for about three years, and Germann says it is continuously being refined. Instilling the discipline in VNS staffers and executives to thoroughly evaluate all the financial and nonfinancial success factors of each project was the greatest challenge, he says.
The other major challenge was defining economic value. Germann says developing the five-point scale for scoring strategic alignment, service improvement and regulatory compliance was relatively easy. Defining quantitative economic value was more difficult. While determining one-time costs and project lifecycle run rates provides a straightforward estimate, the difficulty lay in deciding whether to account for the cost as direct savings, cost avoidance or revenue enhancement. To simplify that step, he quantifies the cost benefit on a numeric scale using an internal rate of return.
The agency is now working on adding post-implementation audits to the project lifecycle. “After several years have gone by, are we really achieving the results that we intended?” Germann asks. “And if not, what can we do going forward to achieve those results or modify our project selection in the future?”
All About Value
Value is now as critical a success factor as deadlines and dollars. And the ability to quantify the business value of nonfinancial factors like strategic alignment and improving service value has helped cast an objective lens to validating and approving IT projects. But ultimately, providing the greatest quality of care is the VNS’s number-one goal. The manner in which this methodology helps focus decision making on that goal helps everyone within the agency, says Jimenez. “The way decisions are made, they focus on projects that will provide the greatest gains for the largest number of users,” she says.