IT Financing

What's wrong with this picture?  A company invested $10 million in a backbone system ten years ago, and that system has now aged to the point where it creaks. A project team is set up to investigate replacement options.   Hard-as-nails management imposes strict R.O.I. criteria on any replacement project.  That is, it has to produce at least one dollar of new benefit for each dollar of cost.  But what are the benefits?  The existing system is functionally OK, it's just a bear to maintain, runs on decrepit and obsolete hardware under a no-longer supported operating system and it is architecturally out of sync with all its neighbor systems.  The net benefit of replacement -- at least net functional benefit -- is negligible.  The team stretches to think up added functionality that will offset cost.  It's a hopeless exercise because the added functions have to offset not only their own cost but the cost of the entire aging backbone that has to be replaced.  The replacement project gets back burnered and the old backbone soldiers on.

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Tom DeMarco

What's wrong here is the notion of R.O.I. for a replacement system.  The original $10 million spent resulted in the creation of a $10 million capital asset, and that asset has been depreciating ever since.  On a straight-line 10-year basis (you'd be crazy to expect an IT system to retain any appreciable value after 10 years), the value of the asset is now down to $0.  We don't commonly think of depreciating IT systems, but we should.  We need to treat them much like the roof over corporate headquarters.  That old original roof has been depreciated every single year since it was installed and now it's down to $0.  It's also worn out, leaking, blowing away in the wind and soaking employees on the top floor.  Time for a replacement.  Do we think about R.O.I. for the new roof?  No.  The old roof is a goner and it's got to be replaced.

So too the aging backbone system.  It's not the R.O.I. of the replacement that we need to consider, but the R.O.I. of the original.  If it once showed benefit of more than $10 million, that benefit is still there.  What's not still there opposite it is a $10 million asset.  Replacing that depreciated asset is just good business practice.  Not replacing it is essentially liquidating your company.  It may look like savvy practice for a while, but eventually it results in having only a hollow shell to manage.

Tom DeMarco
Camden, Maine