Calculating the Business Value of Information Technology
“The ROI of IT”
Presented to
Healthcare Information & Management Systems Society
ME-PI Task Force
Jan. 26, 2007
Dr. Jim Langabeer, CMA
Asst. Controller, MD Anderson Cancer Center
Assoc. Professor, Univ. of Texas School of Public Health
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Calculating Business Value
…a process for analyzing, documenting, and
managing IT projects to maximize key performance
metrics in IT (data, infrastructure, applications)
… a governance model that seeks first to change an
organization’s performance, and then aligns:
Investments > Responsibilities > Accountabilities > Results/Metrics
…not just financial value, it can include many other
types of value as well (e.g., clinical efficacy)
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Costs/Value
IT Value Over a Project Life Cycle
3 key goals
2. Increase max. benefit range
Benefit
Investment
3. Expand the benefit period
Governance
Approval
Initial
Business
Case
1. Escalate initial point of earned value
Implementation
On-Going
Ops.
Life Cycle/Time
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Upgrade/
Replace
Expenses
The Major Activities in Calculating ROI
1. Align Investments to Strategy/Portfolio
2. Establish formalized ROI criteria
3. Define and Measure Performance and
Productivity metrics at most discrete level (Preand Post:
• Time and motion studies
• Productivity analyses (output ÷ input)
• Statistical process control charts
• Metric differential analyses
• Wait line minimization models
4. Convert metrics into associated cash flows
(Identify Benefits and Costs); Create ROI Model
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# 1: Align Investments to Strategy:
Investments Should Model the Ideal Portfolio
Strategic Clinical
Operational
Transactional
Investment
Criteria
Ideal Portfolio
Allocation
Impact on Value
Strategic
15% of total capex $
X # of apps./year
Financial, Patient
Satisfaction
Clinical
20% of total $
Patient
Satisfaction,
Quality,
Productivity
10% of total $
System up-time,
reliability, access,
TCO
Infrastructure
…
Infrastructure
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#2: Establish ROI Investment Criteria
•
•
•
•
•
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Establish investment committees
Define and measure true cost of capital
Establish required hurdle rates based on the CoC
Ensure a set of common business value metrics
• Free cash flow?
• Net present value?
• Payback?
• Internal rates of return?
Most common practices:
• “accept all projects greater than the hurdle rate”
• “accept all projects with positive NPV”
• Rank all projects by investment type and accept
top 3
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#3: Define and Measure KPI & Productivity
1.
2.
3.
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Based on investment type, translate performance into specific metrics,
such as these
• Cost per transaction Processed
• Transactions processed per hour
• Patients visited per nursing hour
• Physicians per available bed
• Cycle times
Measure pre- and post- performance:
• Randomly over an extended period of time
• Using Six-Sigma (SPC), Time & Motion Studies, etc.
Convert KPI’s into $ values
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IT Impacts a broad array of Metrics
Infrastructure
Revenue
Growth
Patient
Satisfaction
Competitive
Position
Strategic/
Informational
Extending
System
System Operability
End of Life
Increased
Capacity
Productivity
Communication
and
Reporting
Business
Value
Reduced
Costs
Improved
Clinical
Efficacy
Mortality
Morbidity
Reduced
Patient
Errors
Clinical
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Operational/
Transactional
Reduce
Manual
Steps
Brand
Controls
and
Compliance
Cycle
Time
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Seamless
Patient
Data
Labor
Savings
Analyze changes in Metrics over time
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#4: Convert Metrics into Cash Flow
Model Benefits & Costs
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Monitor Business Value at Multiple Stages
PREIMPLEMENTATION
•Executive Review of Spending Proposals
•Steering Committee Evaluation
•Business Case Justification
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DEPLOYMENT
•Measurement of Earned
Value to date
•Portfolio Monitoring
•Mid-Project Checkup
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POSTIMPLEMENTATION
•Formal go-live review
•Post-Implementation ROI review
Example: Document Imaging
•Implemented a document imaging system, for use in multiple areas
throughout the hospital
•An application, integrated with our core ERP and Clinical IS that
provides direct access to documents electronically
•Reduces manual effort in handling papers, filing, storing, cataloging,
etc.
•Started first rollout in transactional department (Accounts Payable)
but is subsequently being rolled out to another 5-10 departments
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Example: Document Imaging
•Used to automate workflow for over 25,000 transactions using OCR
& Imaging
•Identified most meaningful metric was Average Cost to Process an
Invoice
•Using SPC and time studies, we documented over a 6-week period:
•$/transaction fell from $5.15 to $4.98 (3% reduction)
•Process cycle time fell by 5 days
•Eliminated significant manual paper backlogs
•Eliminated 2 redundant tracking databases
•Total operational impact on budget > $350,000 annually
•Total implementation costs were <$700,000 over 5 months
•5-year NPV was $235,000 for this initial rollout alone
•Follow up analyses, post-implementation are conducted by
Management Engineering to ensure compliance. Our governance
model gives the implementing department the responsibility and
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accountability to obtain these results.
Major Challenges in Calculating Value
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•Many clinicians and administrators do not feel their work can be
quantified
•Metrics, especially detailed KPI’s, do not exist in many places
•Even if the KPI exists, measurement is not always welcome and is
not routine
•While it is a simple concept, Time studies-used for calculating
labor productivity and cycle time reductions-- are not well
understood
•Holding people accountable for results they promise during
business cases are usually difficult aspects of governance
•Management Engineering departments can play a major role in
this process
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Thanks !
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