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Risk vs. Return for IT Investments

        posted by , 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 Analysis

Cost-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 Quadrant

The risk-return quadrant ranks projects by their risk:return ratio and size.

IT financial management

Risk

Risk 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

Returns

Returns might include revenue, cost savings, customer satisfaction and quality improvements — any benefits that can be quantified.

Garbage in, Garbage out

It 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 Considerations

Risk vs. Return is one of many IT trade-offs. There is no silver bullet for prioritization of IT projects.

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