Modern Network Architecture

Nov 28 2012   6:57PM GMT

How IT affects business value (EBITA)

James Murray James Murray Profile: James Murray

As a Seattle IT Consultant, I find myself working with business owners in all stages of their business.  One of the most eye opening experiences I learned was that most business owners never sell their businesses. The actual statistic is that only about 75% of businesses ever end up being sold.  If we look at businesses under $1,000,000 we find that only 20% of businesses are sold.  Those businesses between 2.5 and 10 Million in value sell a little better at 33%.  What happens to those that don’t sell?  Imagine a top that is spinning.  Eventually the momentum disappears and the top falls over, knocking down all the lives around it.

EBITA (earnings before interest, taxes and amortization) is one factor in evaluating a business.  Most businesses sell for between 2 and 6 times EBITA.  With an average between 2.4 and 2.5 EBTA.  So for a Cash flow type of business if the Annual Cash Flow (notice this number is not gross income, net income, but is rather the cash flow for the year.)  is $100,000 then the approximate value of the business is between 200,000 and $600,000. 

Why is this important to the IT Expert?  We don’t care about the business value of the business!  Do We…?  Should we…?  It of course depends.  You could put on your resume that you were part of a team that closed 100,000 incident tickets over the year… but is that building business value?  If so how?

Let’s take a simple income formula for the business.  Profit = Income – Expenses.  So how does IT affect Profit?  We don’t provide income, but we do reduce the cost of doing business by reducing expenses.  Here’s a classic expense for small business owners.

  • The oldest server with the most important data fails.
  • The business is no longer running because the data is on the server.

Is this a technical failure or a business failure?  Actually it’s a business failure.  We know that HP and the major manufacturers plan a 5 years.  If the age of the server is 7 years we know the server was living by grace.  What should have happened was the accounting group should have put the server on a 5 year depreciation cycle.  Then the server would have been replaced at 5 years.  Of course then, nobody would have had any server downtime.  Does this improve the value of the business?  Actually it does in several ways.

By not having the downtime, there was no loss in workplace productivity.  When businesses are evaluated one variable is “Ability of the company to meet some growth with current plant and equipment.” By replacing the servers on time, the current plant and equipment give the ability to the organization to grow.  If all the servers are over 5 years old, the company would not be able to grow without a huge input of cash to replace the present servers.

We know that 80% of businesses in any industry experience consistent IT Failure.  IT failure reduces worker productivity, which directly reduces the income that a company can create.  When measuring the company’s value, the company’s financial ratios are benchmarked against similar companies in an industry.  If most company’s profitability is reduced by IT downtime, then industry ratios are guaranteed to be higher than average.  This brings the ultimate value of the company higher.  By managing the technology following industry best practices, the IT department can do more than just reduce incident ticket times, but can also increase the real value of the business.  In my work as a Seattle IT consultant, I’ve been able to build business value by 30% with a simple tweak to the network.

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