Don't view software as an expense: researcher
- 11 November, 2007 22:00
A leading business school professor has challenged businesses to radically rethink how they value their IT, after conducting research into technology's business value.
Soumitra Dutta, professor of business and technology at Insead, a French business school, says organisations need to understand the value of technology rather than simply deploying software without measuring results.
"Firms have managed their core software assets not as an asset for value creation, but as an expense item to be minimised. This has to change," he says.
Proper measurement is necessary for making the right investment decisions, says Dutta. This is vital for transparent balance sheets, mergers and acquisitions, joint ventures, licensing and franchising, he says.
It is important for C-level IT executives to make their case to the board. "Both CIOs and CFOs need to be communicating the business value of core software assets to the board and make it a priority to measure the value of their software assets. Core software assets represent the hidden value in firms and need to be correctly measured."
CIOs are too focused on developing complex software systems, and managing the cost of software and maintenance, rather than concentrating on the extra value that core IT assets could bring to the business, Dutta says.
Dutta's research has collected quotes from C-level executives bemoaning their failure to measure IT's value.
One said: "We have been doing ourselves a great disservice. We have created an enormous base of intangible assets [our software systems] and then we have largely elected to ignore it."
Another said: "I have been involved in a number of mergers over the last years. In each case, I had significant challenges in doing the due diligence of the technology systems. If I had a simple way to compute the business value of the software assets, my life would have become much easier."
A lack of adequate tools is making it difficult for businesses to assess the value of their core software assets, Dutta says. He recommends that firms use a research technique called conjoint analysis, which measures the impact of business investments, including IT.
"In a traditional conjoint analysis application, people make trade-offs across different product attributes," he says. In measuring software, "the methodology requires people to make trade-offs across different business outcomes associated with the asset.
"If organisations analyse the conversion of real business outcome attributes generated by core IT systems into measures of business value, then there is a strong opportunity to calculate the real financial value of core software assets to the business."
Dutta's report builds on research first announced last month that was commissioned by application management supplier Micro Focus. It revealed that the vast majority of UK companies were unaware of the financial value IT systems provided to their business. Only a fifth of those interviewed attempted to quantify the contribution IT systems made.