FT.com / By sector - Study urges IT valuation rethink

FT.com / By sector - Study urges IT valuation rethink

Study urges IT valuation rethink
By Pan Kwan Yuk in Paris and Philip Stafford in London

Published: November 4 2007 23:52 | Last updated: November 4 2007 23:52

Companies need to dramatically rethink the way they manage and value their information technology assets if they are to extract better returns from these investments, according to a study published on Monday.

Describing IT hardware and software as the “last remaining hidden corporate asset”, the study, commissioned by Micro Focus, a UK software developer, said core IT assets should be valued with the same rigour and discipline as other corporate assets such as brand and goodwill.

Insead, the Paris-based business school that carried out the research, said that while IT now plays a vital role in driving corporate performance, companies have continued to treat their IT not as assets for value creation but as an expense item to be minimised.

“It’s astounding,” said Soumitra Dutta of Insead.

“While firms have long focused on creating value from physical assets such as factory or store space and intangible assets such as brands, IT assets as a vehicle for value creation have remained largely ignored.”

One problem, according to Prof Dutta, is that even though companies spend billions on IT every year, few boardrooms know the value of their hardware and software and the contributions that they make to their business.

In a study released last month, Micro Focus and Insead found that of the 250 chief information officers and chief finance officers surveyed from companies in the US, UK, France, Germany and Italy, fewer than half had tried to value their IT assets, while 60 per cent did not know the worth of their software.

“When it comes to technology, people tend to get lost in jargon and focus on the new and shiny,” said Stephen Kelly, chief executive of Micro Focus. “Very little thought goes into the benefits that result from the new system and almost none to deriving maximum value from it.”

Yet Prof Dutta said that the potential savings for companies who take the time to analyse the value of their software assets could be huge.

“Think of a house,” he says.

“Would you knock down an entire house when what you need is to update the kitchen? No.

“Yet we see companies spending millions of dollars to build a new IT system every other year when, in many cases, what they needed was just to update the existing one.”

One way Prof Dutta says companies can measure the business value of their core IT assets is through conjoint analysis, a statistical technique used in market research in which people make trade-offs across different attributes.

Copyright The Financial Times Limited 2007