Developing a Common Language of Business Value
posted by David Sward on November 28, 2006
In my previous post, you can measure that, I spent time talking about operational definitions and how using them is critical to objectively measuring business value. Operational definitions lay the foundation for a solid measurement strategy and spell out the process of how measurement is done, but they don’t represent what we are measuring in the language of the customer.
A core component of a business value program is the concept of a using a common language of value that is defined by the customer, not IT. Business value dials (e.g., days of inventory, employee productivity, system end-of-life) represent the common language for identifying the value IT solutions deliver. To define business value dials, you need to know what is seen as valuable through the eyes of your end-users, your customer, and your company. For example, employees responsible for product inventory won’t think of IT solutions in terms of server uptime, database optimization, etc. They want to know specifically how the IT solution is going to allow them to better manage inventory and to do their job better.
Creating business value dials takes time; Tom Pope at Intel did a great job setting up the value dials we use. In deciding what value dials to create, IT managers must think differently about how they evaluate successful IT investments. What, specifically does the customer hope to achieve? How will they know when they have achieved it? The answers to these questions should be stated in the language of the customer, and become the metrics for measuring the financial success of IT investments.
Below are some example business value dials. Each value dial has a standard description and calculation. Many of our definitions represent fairly standard financial concepts, but we found that laying them out in clear, business specific, language was critical in re-aligning the IT mind set toward specific types of value delivery, and in making our assertion of value delivery clear and crisp. I’ll cover the employee productivity value dial in my next post as it is often hotly debated.
1) Days of Inventory: Reductions in days of inventory lead to value in finished goods, work in process, or raw material inventories. It is calculated using (value of 1 day) x (days of inventory removed) x 15% (weighted average cost of capital).
2) Employee Productivity: Gains in headcount efficiencies or effectiveness. Headcount is expected to produce more through these gains due to the additional time-based efficiencies. It is calculated using (number of employees affected) x (time) x (average cost of an employee) x (50%).
3) System End-of-Life: Removing unnecessary IT support and maintenance costs as a result of a new system upgrade or consolidation of multiple systems. The gross benefits of this removal are included in this dial. It is determined from the cost of maintaining the legacy system.
Business value dials provide common definitions, context, and focus on where IT solutions are delivering value. They provide a framework for IT professionals to understand how to quantify the business benefits of IT. Using this common language, IT groups can more effectively communicate the value they deliver through IT solutions. This approach helps IT put into proper perspective the business problem, the necessary business and financial modeling, and the necessary discussions for making a good business decision.
Comments (5)
tagged: business, business value, business value dials, common language, IT, operational definition, value
Comments
Nov 30 | Mario Devargas said:
I am the ICT Director for Bolton MBC and I have found the Intel document “Managing IT Investments” interesting reading - how can I get my hands on the Excel “Project Comparison Matrix” template - and for that matter ALL other templates (word and excel) which goes with this document.
Thanks.
Dec 02 | David Sward said:
I’m glad you are finding the information useful. There are a number of good locations to get additional information. I’ll suggest two for now:
I hope this information helps.
Dec 04 | Linda Bradley said:
I have read your last couple of posts and I have found them very interesting, especially as we are currently trying to assess which technology to deploy in our organization. In other words we are having to make a choice - looking at it solely from a customers stand point is a refreshing and interesting concept which we would like to try. Am I correct in understanding that there is a set of business value dials we can obtain from you which we can utilize in our own organization?
Dec 04 | Mark said:
I attended the Ziff Davis presentation you gave last week - it really clarified a lot for me - thank you - in that presentation you made it abundantly clear that without the support of the finance department a business value program will not get off the ground - can you give me any advice as to how to get Finance to partner with us (IT department) - what can I tell them to make them sit up and listen?
Dec 04 | David Sward said:
Hi Linda and thank you for your comments. There is a standard set of business value dials that you can use to get started. They are the values dials we have developed and used within Intel. They are summarized in this white paper http://www.intel.com/it/pdf/ITBV-Program.pdf which I think will be helpful.
It is important to keep in mind that these business value dials have been developed based on what our IT customer’s see as valuable - a core tenet of a well run business value program is that value is defined by your customers. I recommend you use our dials as a basis to work with your customers to help you identify what important business value dials may look like for your organization and modify these as necessary.
You can use our business value dials as a guide, but if you are serious about implementing a business value program you have to determine value based solely on what your customers see as important.