PAYBACK AND RISK

The payback question — how soon will we get our money back? — is one that we as individuals would ask almost instinctively if invited by a friend to put money into some ‘little earner’ that they had in mind, such as (perhaps) producing and selling the new jelly-slicer that the world has been waiting for. Why is this? The reason is associated with the idea of risk and uncertainty. Most of us, if we have any spare cash, put it into something that we believe to be reasonably safe. Most of us are, as the jargon has it, risk-averse.

In the previous chapter we looked at an example that categorized IT investments into three levels of project risk. A straight technology replacement proposal, with new but proven technology from the same trusted supplier, and with no change to existing applications, might be regarded as low risk. Undertaking a new application, one that is new for us but that has been available for years and used successfully by many organizations like ours, might be regarded as medium risk but still reasonably safe. However, what about being one of the first organizations to invest in a completely new application, using new technology and never before tried in our industry? That is perhaps rather closer to the jelly-slicer in terms of risk.