All IT managers, project/program and portfolio managers know how difficult it is to assess the value of an IT investment and to discuss this value with senior executives. It's easy to mention qualitative benefits such as "it will be easier to take orders" or "it enables a real-time link with our accounting software" or "faster machines will allow our team to be more productive". All this is great, but what we really need is a dollar value for these projects. Indeed you certainly noticed that when you present a chart or table as a summary, all eyes quickly dart toward the $ figure at the bottom line. Not only do we need to calculate an objective value expressed as a return on investment (ROI), but we need to take the competing alternatives into account.

Total Value of Opportunity (TVO), also named Total Value of Ownership, is an ROI-type business metrics that helps calculate the business value of an investment and can be applied, among others, to IT projects. TVO takes alternatives into account by calculating the opportunity cost of not doing something else. This "something else" is usually made of one or two alternative, plus the status quo alternative (i.e. not doing anything).

I will illustrate the TVO method based on a recent consulting mission where I had to recommend a software development and project management methodology for a client. The numbers, of course, are not real.

For the story, I recommended OpenUP over two alternatives. Here is the table summarizing hypothetic costs for OpenUP implementation in the client company. The horizon has been decided at 3 years. The discount rate used for Net Present Value (NPV) calculation has been set at 25% (5% risk-free rate + 20% risk premium). The cost items are listed in the investment section and are self-explanatory. TCO stands for Total Cost of Ownership, a widely used costing method applicable to IT projects. The return section is made of two items: efficiency represents the cost savings through better management of projects, and additional projects represents the extra profit that will come from new projects that would not have been obtained without implementing OpenUP (implementing a reputable methodology is a strong commercial argument).

Table 1 - NPV analysis for OpenUP implementation

However, our TVO analysis is not complete. We still have to take alternatives into account. The alternatives are often referred to as opportunity costs or indirect costs. Here we will only mention the status quo alternative, which reflects the choice of not implementing any software development methodology but marginally improving the existing software development process.

Table 2 - NPV analysis for status quo alternative

As a result, our TVO is the NPV of the first alternative (OpenUP) minus the NPV of the second alternative (status quo), with a result of $63,200.

Finally, TVO also requires examining qualitative effects on the business and on the people, such as alignment with the vision, solution to customers' complaints, and general comfort of people affected by the project.