Assessing the value of IT investments has posed a challenge throughout my 35+ year career as a healthcare CIO. With the growing demand for digital health solutions and the surge of interest in AI in its various forms, establishing a reliable IT investment valuation process has grown increasingly crucial.
A simple one-dimensional analysis of a healthcare investment is rarely sufficient. Too often we use ROI, IRR, or TCO alone. All are important but using only one is insufficient for most IT investment assessments. StarBridge Advisors has a Value of Investment (VOI) framework that uses a holistic approach. It includes some traditional financial metrics (see list below in next set of bullets) and expands the traditional approach to include the following elements:
- Flexibility – the ability to do something with new processes or technologies that are not readily achievable in either a manual or other automated fashion, e.g., using smart phones to locate the closest mobile imaging device or AI to evaluate images with a degree of confidence not achievable by a human being given the limitations of human vision and diligence.
- Intangibles – non-physical assets and elements that contribute value but are not tangible or touchable, e.g., clinical outcomes, mortality rates, satisfaction, loyalty, brand promotion, intellectual property (which might include patents, trademarks, copyrights, and trade secrets that provide a competitive edge). Sometimes the most impactful intangibles are anecdotes or stories that personalize the investment decision and pull at the heart strings.
- Social Value – the ability to appeal to a patient and family need, for example, restoring a sense of control to a patient and family by enabling them to control their care environment or review and suggest corrections, if needed, to the contents of their electronic health record. Culturally competent care, interpreter services, and wayfinding are impactful and should be measured.
- Risk identification and management – critical to ensuring that value can be achieved. StarBridge Advisors has identified 9 categories of risk and has multiple questions for each designed to provoke discussions that help an organization determine an acceptable level of risk based on a wide range of factors.
- Accountability – ensuring that the individuals who will implement, deploy, and use the IT asset take personal responsibility for achieving anticipated or better than expected results.
Here’s a list of useful financial metrics, most of which are a part of every VOI. They are listed in the order that we see most often.
- TCO (total cost of ownership) should include all direct and indirect costs. Too often there are many elements omitted from a TCO. Accompanying the TCO should be the payback period and a CBA (cost benefits analysis) which compares the project TCO versus the total expected benefits. If a benefit cannot be relied upon (e.g., time savings which allow reductions in salaries) it should not be included in the CBA. Too often time savings that don’t impact a budget are added to CBAs.
- ROI (return on investment) compares the financial return of the IT asset relative to its cost.
- IRR (internal rate of return) uses a discount rate that makes the NPV of all cash flows from the investment equal to zero to evaluate the profitability of potential investments.
- NPV (net present value) is the present value of cash flows generated by the IT asset minus the initial investment.
Other analyses are helpful to consider as you compile information for the VOI. Most of the items in this group are measurable intangibles.
- Stakeholder Impact, a metric for intangibles tracks improvements in stakeholder satisfaction, productivity, and engagement and helps quantify the impact on their experience and is usually done by survey or direct observation.
- Capability-based Assessment evaluates how the IT asset supports and enhances business capability, and often includes but is not limited to improvements in business processes, operational efficiency, and competitive advantage.
- Market and Competitive Positioning considers how the IT asset positions the company in the market and looks at the competitive advantages gained. Examples include ED wait times often posted on billboards and innovative care and delivery options which target specific populations – like children and seniors. Others often advertise on TV targeting specific audiences, e.g., sports enthusiasts during sporting events.
- Strategic Alignment and Value determines how well the IT asset aligns with the organization’s strategic goals including factors such as enabling new business models, supporting innovation, and improving customer satisfaction.
- Intellectual Capital includes intellectual property, brand value, and organizational knowledge. Some IT assets can help your organization build a knowledge base (important if you’re interested in training AI using your trusted data and other sources of interest) and enhancing your innovation capacity.
Another popular approach to consider is a balanced scorecard which provides metrics across financial and customer perspectives as well as internal business processes, learning and growth. These are common but not universal metrics. Scorecards should be personalized to satisfy the unique reporting requirements of the organization.
In many cases, one can find benchmarks and best practices which allow an organization to compare the value of its assets against others – usually similar organizations. The challenge with benchmarks and best practices is the validity of the benchmarks and the nature of the organizations which contributed to the benchmarking data source. Baselines may be a better approach. Baselines allow you to compare your ongoing performance against past performance and assess more objectively whether you’re making progress or not.
There simply aren’t enough resources to do everything. Like all other investments, evaluation of IT assets is important and should be subjected to the rigor of portfolio management. Use existing IT and demand management processes informed by the objectivity of the elements in the VOI framework.
StarBridge Advisors has seasoned advisors and tools that can help you develop and deploy a personalized VOI framework. Contact us if you are interested in exploring further.