Whether it's purchasing a new information system or upgrading existing technology, weighing an investment in information technology (IT) can be particularly challenging. Factors contributing to the pressure-filled situation are numerous.
The magnitude of IT operating and capital budgets. IT operating expenses may consume 2 to 3 percent of the total operating budget, and IT capital may claim 15 to 30 percent of all capital. As a result, an investment in IT easily can mean the difference between a negative or positive operating margin. Also important is the potential impact on competing interests and strategic planning. An IT capital expenditure of 15 to 30 percent reduces the amount of funding available for opportunities such as biomedical equipment, which could be used for new revenue, and buildings, which support the growth of clinical services.
The projected growth in IT budgets. Provider organizations may permit overall operating budgets to increase at a rate close to the medical inflation rate. However, expenditures on IT often experience growth rates of an additional 2 to 5 percent. At some point, an organization will note that the IT budget growth rate may single-handedly lead to insolvency.
Demand often seems insatiable. Worthwhile proposals go unfunded every year. And infrastructure replacement and upgrades can seem never ending. It's not uncommon to hear leadership say: "I thought we upgraded our network two years ago. Are you back already?"
It is difficult to evaluate IT budget requests. IT's diverse applications can make the examination process challenging. For example, it can be difficult to compare a proposal that is directed to improve service with other proposals designed to improve care quality, increase revenue, or achieve some level of regulatory compliance.
Reputations for failure are difficult to outlive. Leadership may return blank stares when asked, "List three instances over the past five years where IT investments have resulted in clear and unarguable returns to the organization." However, the conversation may be difficult to stop when asked, "List three major IT investment disappointments that have occurred over the past five years."
Despite these numerous obstacles, some techniques can help aid the process of assessing IT value. Finding the most useful approach typically begins with understanding that value from IT investment decisions is real and diverse.
Where's the Value?
Value occurs when IT implementations catalyze or contribute to tangible improvements in organizational performance, such as reductions in medical errors, reductions in costs, improvements in service, and increases in revenue. Practical examples of IT applications producing value are numerous.
At Boston-based Partners HealthCare System, an analysis of the costs and benefits of the computerized medical record shows that financial benefits can range from $9,000 to $19,000 per physician FTE per year. This revenue can be captured through reduction in transcription costs and record-retrieval costs, improved conformance to ordering from approved formularies in cases where risk is shared, and improved billing accuracy.
At Brigham and Women's Hospital, a member of the Partners system, inpatient providerorder entry has led to a 55 percent reduction in serious medication errors. The technology employed highlights possible drug allergies, drug-drug interactions, and drug-laboratory result problems at the time of medication order entry.
At a health center of Massachusetts General Hospital, also a member of the Partners system, implementation of a picture archival and communication system (PACS) has reduced time spent for interpreting radiology images from 72 hours to one hour. Introduction of the technology also has reduced the cost of an examination by 30 percent and reduced the time that image-intense specialists, such as neurosurgeons, spend trying to locate films. These and similar experiences at other organizations clearly demonstrate that opportunities for value creation through IT implementation are real and diverse.
How Do You Find Value?
The diversity of value means that the analyses of proposed IT investments must use diverse techniques. The investment-analysis technique of calculating return on investment (ROI) comes to mind first, and in many cases it is effective. For example, managers can calculate an ROI if a set of investments, including an IT component, is intended to reduce clerical staff.
However, there are times when calculating ROI is clearly not appropriate, particularly in relation to strategic initiatives. For example, consider determining the ROI of electronic mail or word processing. Such an analysis would not fully capture the benefits of the technology. What's more, the technology's full impact would most likely not be understood until years after the investment. When it comes to strategic uses of IT, ROI analysis done at the time of weighing an investment frequently becomes wrong and is highly speculative at the very least.
Rather than depending solely on ROI analysis, a beter approach for financial managers is to choose an analysis technique that varies by the type of objectives that the IT investment intends to support. According to Dartmouth College professor J. Brian Quinn, there are six categories of IT investments:a
- Cost reduction
- New products and services
- Quality improvement
- Major strategic initiative
Infrastructure. IT investments can be infrastructure that enables other investments or applications to be implemented and deliver desired capabilities. Examples include data communication networks, personal computers, and clinical data repositories. A delivery-system-wide data communications network enables organizations to implement applications to consolidate clinical laboratories, establish organization-wide electronic mail, and share patient health data among providers.
It is difficult to quantitatively assess the impact or value of infrastructure investments:
- They enable other applications. Without those applications, infrastructure has no value. Hence, infrastructure value is indirect and depends upon application value.
- The ability to allocate infrastructure value across applications is limited. Of the millions of dollars invested in a data communication network, determining how much of that investment can be allocated to the ability to create delivery-system-wide electronic medical records may be impossible.
- A good IT infrastructure is often determined by its agility, potency, and ability to facilitate integration of applications. It is not easy to assign ROI numbers or any meaningful "value" number to some of these characteristics.
For example, what's the value of being able to, because of agility, speed up the time it takes to develop and enhance applications?
Information system infrastructure is as hard to evaluate as other organizational "infrastructure," such as having talented, educated staff. As with other infrastructure, evaluation is often instinctive and experientially based. Underinvesting can severely limit the organization. When choosing between investment alternatives, assessment should be based upon the ability to achieve agreed-upon goals to whatever extent possible. These goals may be complex to quantify in terms of dollars. Ex-amples might include moving images across the system, facilitating high availability of information systems, and allowing for rapid application development.
Mandated. Information system investment also may be necessary because of mandated initiatives, such as the reporting of quality data to accrediting organizations, making required changes in billing formats, or complying with HIPAA. Organizations typically assess mandated initiatives by identifying the alternative that is the least expensive and quickest to implement while still maintaining some level of compliance.
Cost reduction. Information system investments directed to cost reduction typically are amenable to ROI and other quantifiable dollar-impact analyses. A more germane issue, however, typically is the ability of management to effect the predicted cost reduction or avoidance.
New products and services. Investment in IT can be critical to the development of new products and services. At times, the information system delivers the new service or is itself the product. Examples of information-system-based new services include bank cash-management programs and credit card/airline mileage linkage programs. In health care, a new service may be providing patients with web access to clinical guidelines or creating consumer-oriented medical textbooks.
ROI assessment is appropriate for some of these new products and services. However, such an assessment should be supplemented with an analysis of potential revenues, resulting either from the service directly or through service-induced utilization of other products and services. Also, it is important to note that IT investments directed toward new products and services typically have a speculative component. This component includes customer utilization, competitor response, and impact on related businesses.
Quality improvement. Information systems also can improve the quality of service or medical care. Goals for these types of IT investments may include reducing wait times, improving the ability of physicians to locate information, improving treatment outcomes, or reducing errors in treatment.
Although evaluation of these initiatives is quantifiable, results are only as useful as the accuracy with which the service parameters selected measure service performance. A quantifiable dollar outcome of service or care quality improvement can be very hard to predict. Service quality is often necessary to protect current business, and it can be difficult to predict the financial effect of failing to continuously improve service or medical care.
Major strategic initiative. Strategic initiatives in IT are intended to significantly advance the competitive position of the organization or redefine the core nature of the enterprise. In health care, it is rare that information systems are the centerpiece of redefinition of the organization. However, other industries have attempted IT-centric transformations: Amazon.com is an effort to transform retailing, and Schwab.com is an undertaking intended to redefine the brokerage industry through the use of the web.
There can be an ROI core or component to analysis of IT investments supporting major strategic initiatives. However, accurately assessing the ROI of these investments typically is problematic. Several factors contribute to this difficulty:
- The initiatives usually recast the company's markets and its roles, and the outcome of the recasting, although visionary, can be difficult to see with clarity and certainty.
- The recasting is evolutionary, with the organization learning and altering itself as it progresses over what are often lengthy periods of time. It is difficult to be prescriptive about this evolutionary process.
- Market and competitor response can be hard to predict.
Determinations of the value of IT investments to support strategic initiatives should keep these limitations in mind and appreciate their overall impact on the analysis and future outcomes.
What Does It All Mean?
Several summary observations can be offered about the diversity of IT-enabled value:
- The value realized from IT investments can be real and, at times, dramatic
- The value across investments is diverse, making it difficult to compare investments
- The value of any one investment can be diverse, making it difficult to distill the investment to a single number or single type of analysis (for example, ROI)
- The appropriate analysis of an IT investment depends on its core intent-investments designed to reduce costs should be evaluated differently from those intended to transform an organization
- Diversity of IT-based value and the resulting difficulty in value assessment is not likely to go away
Finance leadership is often confronted with a portfolio of investment proposals that have very diverse value propositions. Identifying the "optimal" portfolio of investments from among these opportunities is very challenging and invariably involves a combination of analysis, judgment, and politics. IT investments, as a class, are difficult to assess. Although there are several approaches that can ease the challenge, no approach makes the challenge easy.
John Glaser is vice president and CIO, Partners HealthCare System, Boston. Questions or comments about this article can be sent to the author at email@example.com.
a. Quinn, J. Brian, et al., Information Technology in the Service Society. Washington, D.C.: National Academy Press, 1994.
Publication Date: Saturday, March 01, 2003