Page # 1 Calculating the Business Value of Information Technology “The ROI of IT” Presented to Healthcare Information & Management Systems Society ME-PI Task Force Jan. 26, 2007 Dr. Jim Langabeer, CMA Asst. Controller, MD Anderson Cancer Center Assoc. Professor, Univ. of Texas School of Public Health

Page # 2 Calculating Business Value …a process for analyzing, documenting, and managing IT projects to maximize key performance metrics in IT (data, infrastructure, applications) … a governance model that seeks first to change an organization’s performance, and then aligns: Investments > Responsibilities > Accountabilities > Results/Metrics …not just financial value, it can include many other types of value as well (e.g., clinical efficacy)

Page # 3 Costs/Value IT Value Over a Project Life Cycle 3 key goals Life Cycle/Time Investment Implementation Initial Business Case On-Going Ops. Governance Approval Upgrade/ Replace 1. Escalate initial point of earned value 2. Increase max. benefit range 3. Expand the benefit period Expenses Benefit

Page # 4 The Major Activities in Calculating ROI 1.Align Investments to Strategy/Portfolio 2.Establish formalized ROI criteria 3.Define and Measure Performance and Productivity metrics at most discrete level (Pre- and Post: Time and motion studies Productivity analyses (output ÷ input) Statistical process control charts Metric differential analyses Wait line minimization models 4.Convert metrics into associated cash flows (Identify Benefits and Costs); Create ROI Model

Page # 5 # 1: Align Investments to Strategy: Investments Should Model the Ideal Portfolio Operational Infrastructure StrategicClinical Transactional Investment Criteria Ideal Portfolio Allocation Impact on Value Strategic15% of total capex $ X # of apps./year Financial, Patient Satisfaction Clinical20% of total $Patient Satisfaction, Quality, Productivity … Infrastructure10% of total $System up-time, reliability, access, TCO

Page # 6 #2: Establish ROI Investment Criteria Establish investment committees Define and measure true cost of capital Establish required hurdle rates based on the CoC Ensure a set of common business value metrics Free cash flow? Net present value? Payback? Internal rates of return? Most common practices: “accept all projects greater than the hurdle rate” “accept all projects with positive NPV” Rank all projects by investment type and accept top 3

Page # 7 #3: Define and Measure KPI & Productivity 1.Based on investment type, translate performance into specific metrics, such as these Cost per transaction Processed Transactions processed per hour Patients visited per nursing hour Physicians per available bed Cycle times 2.Measure pre- and post- performance: Randomly over an extended period of time Using Six-Sigma (SPC), Time & Motion Studies, etc. 3.Convert KPI’s into $ values

Page # 8 IT Impacts a broad array of Metrics Reduced Costs Productivity Business Value Increased Capacity Labor Savings Reduce Manual Steps Cycle Time Competitive Position Patient Satisfaction Controls and Compliance Revenue Growth Brand Communication and Reporting Strategic/ Informational Operational/ Transactional Infrastructure Extending System End of Life System Operability Improved Clinical Efficacy Mortality Morbidity Reduced Patient Errors Seamless Patient Data Clinical

Page # 9 Analyze changes in Metrics over time

Page # 10 #4: Convert Metrics into Cash Flow Model Benefits & Costs

Page # 11 PRE- IMPLEMENTATION POST- IMPLEMENTATION DEPLOYMENT Executive Review of Spending Proposals Steering Committee Evaluation Business Case Justification Measurement of Earned Value to date Portfolio Monitoring Mid-Project Checkup Formal go-live review Post-Implementation ROI review Monitor Business Value at Multiple Stages

Page # 12 Implemented a document imaging system, for use in multiple areas throughout the hospital An application, integrated with our core ERP and Clinical IS that provides direct access to documents electronically Reduces manual effort in handling papers, filing, storing, cataloging, etc. Started first rollout in transactional department (Accounts Payable) but is subsequently being rolled out to another 5-10 departments Example: Document Imaging

Page # 13 Used to automate workflow for over 25,000 transactions using OCR & Imaging Identified most meaningful metric was Average Cost to Process an Invoice Using SPC and time studies, we documented over a 6-week period: $/transaction fell from $5.15 to $4.98 (3% reduction) Process cycle time fell by 5 days Eliminated significant manual paper backlogs Eliminated 2 redundant tracking databases Total operational impact on budget > $350,000 annually Total implementation costs were <$700,000 over 5 months 5-year NPV was $235,000 for this initial rollout alone Follow up analyses, post-implementation are conducted by Management Engineering to ensure compliance. Our governance model gives the implementing department the responsibility and accountability to obtain these results. Example: Document Imaging

Page # 14 Many clinicians and administrators do not feel their work can be quantified Metrics, especially detailed KPI’s, do not exist in many places Even if the KPI exists, measurement is not always welcome and is not routine While it is a simple concept, Time studies-used for calculating labor productivity and cycle time reductions-- are not well understood Holding people accountable for results they promise during business cases are usually difficult aspects of governance Management Engineering departments can play a major role in this process Major Challenges in Calculating Value

Page # 15 Thanks !