Risk vs. Return for IT Investmentsposted by John Spacey, April 17, 2011
Risk vs. Return is a fundamental architectural trade-off. It is also an important consideration for IT Financial Management (ITFM).
Beyond Cost-benefit AnalysisCost-benefit analysis techniques are based on relatively static estimates of cost and return. Risk vs. Return models go beyond cost — estimating risks of more costs or less benefits.
Risk-Return QuadrantThe risk-return quadrant ranks projects by their risk:return ratio and size.
RiskRisk includes the dollar value of the project. Ideally it also includes:
- risks of cost and time overruns
- risks of project failure
- any risks tied to related business plans
ReturnsReturns might include revenue, cost savings, customer satisfaction and quality improvements — any benefits that can be quantified.
Garbage in, Garbage outIt can be difficult to accurately estimate risk and return. Unless you have full confidence in your models — Risk vs. Return analysis needs to be taken with a grain of salt.
Other ConsiderationsRisk vs. Return is one of many IT trade-offs. There is no silver bullet for prioritization of IT projects.
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