Valuation of an IT Project

Valuing an IT project is easier said than done. If you are lucky, you work for an organization that dictates the financial metrics used to evaluate a particular type of project. But, if you are putting together a proposal for an organization that has no such requirements, how do you show your potential client the value of your proposal?

Ideally, multiple financial metrics should be calculated to show the value of your proposal from different perspectives. But which one(s) should you pick? ROI? NPV? Payback Period? The list goes on an on. I would recommend taking a more methodical approach to which financial metrics should be included in your proposal.

First, lets start with costs. These are the easiest thing to calculate. Simply add up the cost of all of you hardware and software. Don't stop there. You like to eat don't you? In other words, your time is worth something too. You need to be paid for your design time and estimated installation time. What is a good rate to charge? Check out http://www.payscale.com/ for rates in your area for different types of jobs.

Now, here is where the methodology part comes in. Is this proposal geared towards helping the organization make more money by being more productive for example? Or, does your proposal help the organization reduce costs and thus save money? The idea for this comes from Porter's Value Chain in which he argues about two type of activities that occur within organizations. They can be loosely grouped into Primary and Support activities. Primary Activities are geared to actually producing the product of service while Support Activities are geared towards helping the organization continue to function "behind the scenes" so to speak.

If the solution your proposal addresses is for the organization's Primary Activities, then I would argue that your focus needs to focus on how much money the new system can help generate. Traditional financial metrics like ROI, NPV, and Payback Period are good metrics for this purpose. They all provide different perspectives on how a project affects the bottom line. I recommend that you use multiple financial metrics as often times, it is difficult to determine the preference that a decision maker might have. If you already have multiple metrics calculated in your proposal, it looks like you have done your due diligence.

If your proposal focuses on Support Activities, your proposal should be focusing on keeping costs to a minimum. This is not to say a cheap solution is in order. Rather, the focus is on minimizing the long term costs of the solution. So, while it may cost more for a particular type of cabling, it may make sense to use it if it does not have to be replaced for a longer period of time. TCO and NCO are two common methods for evaluating these types of projects. For more a more detailed example of calculations, view my online text.

With both of these approaches, it is not enough to simply create the calculations. You need to interpret them as well. Tell the reader of your proposal what the Payback Period is for example. Do not assume they know. Explain the assumptions you have made. Source your products so you can easily find the documentation to them quickly. This is a volatile market. Prices can change quickly and having your prices in your proposal based on older data can be the difference in getting your proposal accepted or rejected. Remember, this is a dance. So, it is not just about listing the figures and being done with it. You are telling (and selling) a story. So, sell your solution.