Thursday, December 11, 2008

Philadelphia-Area Software Process Improvement Network Meeting

I attended the Philadelphia-Area SPIN (Software Process Improvement Network) meeting tonight. The topic was: “How can we measure the value of IT?” Michael Harris from David Consulting Group (www.davidconsultinggroup.com) made the presentation. The phrase “beauty is in the eye of the beholder” implies that what one person things is beautiful another may not. Value is similar. This leads to a similar phrase, “value is in the eye of the beholder”. A developer may value the beauty of a well crafted program. But unless the program generates revenue for the company, management may not see the value or beauty in the program. Mr. Harris brought up an interesting point: value has a time component. For example, if an information technology organization delivers a project that is late by only ten percent, the market value of the project may actually be fifty percent less. I like the analogy of going to a restaurant. I value restaurants that quickly seat and serve you. If a restaurant takes ninety minutes to bring me a meal, no matter how good the meal is, I will not go back to that restaurant. The meal decreased in value the longer it takes to prepare it. The same is true with software development. If you take too long to create the software the market may have found a different solution. The decreasing value over time is the reason for many innovations in information technology. For example, we want a new computer because it is faster than the old one. The value of the computer has decreased because a faster model now exists. I believe our current financial crisis is based on the false premise that homes should increase in value over time. Why should a home increase in value? The plumbing does not get better over time. The furnace and water heaters do not improve with age. Businesses depreciate the cost of buildings and equipment over time because they are worth less as they age. Getting back to the topic of the meeting, Mr. Harris described a variety of standard financial methods that anyone in management in IT should know and understand. Mr. Harris stated the best method was Real Option Valuation. I need to dig a bit deeper into this methodology. I added a book to my wish list: “20/20 Foresight: Crafting Strategy in an Uncertain World” by Hugh Courtney.

1 comment:

Mark said...

Hi Jeff...enjoyed reading your post.

The false assumption that home values would steadily continue their extraordinarily rapid pace upward was, I agree, a major contributing factor behind the irrational behavior leading to the collapse of the housing bubble.

However, I disagree that home (and land) values increasing over time is a false assumption in general, because the data shows that this is what actually happens. It's very similar to looking at what the stock market does over time: it goes up.

However, I will admit, the long term upward historical trends in real estate and the stock market do not necessarily imply their own continuance during the next however many years, decades, and centuries. Big things capable of undermining an entire civilization's prosperity can -- and do! -- happen over time. In this larger sense, I agree with your statement about home values.

Mark Bowron