Systems Don't have Costs, Strategies Have

As a strategic IT consultant for some time, I've seen several cycles of system selection and implementation. Most of the organizations adopt a common sense approach to system selection. Invariably, system selection process is driven by the IT department. This common sense system selection process follows a standard route in IT departments. A process is defined and the requirements are collected by business analysts. These requirements provide a basis for creation of an RFP document. After receiving RFP responses, system features are reviewed, compared and a list of candidate systems is prepared. Next round features intense discussions with business teams to narrow down system selection to two systems. In the final round a financial analysis is carried out that compares total cost of ownership (TCO) of candidate systems and projects an estimated return on investment.

This common sense approach is just as accurate as the common sense perception that makes a full moon look closer and five time larger when it is on the horizon. It is a waste of time to calculate total cost of ownership (TCO) of systems. Systems don't have total cost of ownership, strategies have. Systems should be selected based on their "fit" with a given business strategy. This strategic fit means consistency within the system of activities so that there are no conflicts among activities that generate valued business results. Each activity supports and enhances other activities within this configuration of activities. The competitive advantage emerging from such an optimized system of activities is sustainable, since it is hard to copy an entire system of activities.

In such a scenario a chosen system is just a part of an overall strategy. The right way to evaluate each strategy is to do an economic value-added analysis (EVA) that includes a comprehensive analysis of changes in cost structure, growth and revenue opportunities. EVA take opportunity cost into consideration too. Based on this approach, one can prepare projected financial statements of the entire business under each strategy scenario and measure creation of shareholder value. This provides a holistic way of evaluating performance of different business strategies and their impact on business as a whole. System selection is just a by-product of strategy selection.