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Quantifying intangible value

Quantifying intangible value

Challenge-inspired people see that, in mastering the improbable, they have an opportunity to make a difference and, perhaps, to leave a legacy. This comes to mind because of the untimely death, from cancer, of Dr Derek Binney, a good friend of mine who was only 54 when he passed away.

It takes a brave person to tackle a hard challenge because these are likely to be thankless tasks. The chance of failure is high so you might spend a lot of effort getting nowhere. Why risk your career or reputation on something so difficult? Yet, for some people, a challenge makes a task more compelling.

Challenge-inspired people see that, in mastering the improbable, they have an opportunity to make a difference and, perhaps, to leave a legacy. This comes to mind because of the untimely death, from cancer, of Dr Derek Binney, a good friend of mine who was only 54 when he passed away.

I got to know Derek recently through his work as Chief Technology Officer at CSC Australia and as the Director of their Office of Innovation. There he examined trends in IT technologies and issues affecting IT investments. His role was to assist CIOs in the design and justification of ICT investment proposals. For someone used to the relatively narrow time horizons of ICT vendors, I found Derek to be a revelation. He was someone who understood that the real challenge is not making the next sale, it is about tackling the business perception that IT never delivers.

In the last 50 years, ICT has transformed business, improved record keeping, and streamlined processes. It has empowered decision makers and accelerated transactions. Yet the reward for all these efficiencies is that it is viewed, at best, by many executives, as 'a necessary evil'. Like Henry Ford's perceptions of his advertising budget, they expect a waste of about 50 per cent of their investments in IT. Unfortunately, they don't know which half that is. Derek tried to do something about this. He elected to tackle probably the thorniest challenge facing this industry: quantifying the value that is generated by an IT investment.

Lamentable IT project success

There are a number of reasons why business has such a low opinion of IT. As the Standish Group points out in their long-running research, the success rate for IT projects is lamentable. While things have improved in the last decade, 65 per cent of IT development projects are still delivered either late, over budget, or without some of their promised functionality. This means that nearly two-thirds of executive sponsors, of any IT project, are likely to end up disappointed. In the eyes of many experienced executives, such a track record means that IT is synonymous with failure.

This reputation is compounded by the difficulty of quantifying the full impact of an ICT investment. How do you put a value on the impact IT spending will have on areas such as improved customer service or in enhancing employee decision making? Worse still, the benefits reaped by an IT investment are likely to be in other parts of the business. Here the business executive will claim the credit while the IT department is lumbered with the cost. Take the banking industry as an example; the reward for the operational efficiencies generated by ICT investments like ATMs and Internet banking has been that, in Australia at least, most of the IT departments have found that a lot of their work has been outsourced for supposed cost-efficiency reasons. On the other hand the business executives who have most benefited from these ICT generated cost-efficiencies have, typically, been recompensed with significantly improved salary packages.

Becoming a 'business enabler'

It seems that, unless this industry can help the business put a value to the benefits that IT generates, then it will always be condemned, by those who control the purse strings, as a cost centre, rather than a business enabler. Yet this challenge has faced the industry ever since organisations began to invest in data processing back in the 1950's. Despite this, Derek did not shirk from the task when he was commissioned by the Australian Government Office of the CIO (AGIMO) to help it determine the intangible capital value that is generated by an ICT investment.

As his starting point to come up with something different, Derek used the work of Karl-Erik Sveiby. Back in the early 1990's, Sveiby first advocated the need to capture the intellectual capital of a business on its balance sheets. He argued that the value of market capitalisation is usually much higher than the book value of a business. In his mind this difference represented the intangible value that was generated by the people, processes and reputation of an organisation. Sveiby called this 'value intellectual capital'. Derek took this further and segmented it into three components, which he called 'The Tripartite Model of Organisational Intangible Resources'-structural capital, human capital and relational capital.

Framework components

The first of the components in this framework is structural capital which is the structures (e.g. ICT equipment) and processes that employees develop and deploy to be productive. Derek saw the effectiveness of this capability produced value to a business. The next component is human capital which was seen as the value generated by the skills and competencies of the staff in an organisation. The final component is relational capital which is something akin to what accountants classify as 'goodwill'. Derek saw it as the value arising from an organisation's relationship with external stakeholders such as clients, suppliers and the community.

Derek recognised that in each of these three components ICT can contribute to the intangible value of a business. Therefore, he began to identify the ways in which ICT could create value in each of these areas. From his analysis Derek identified 24 areas or elements where intangible value could be generated from an ICT investment. He recommended these elements be inserted in to the tripartite model he devised. This model is in effect a table where each of these 24 elements are a separate row while the columns examine four ways in which each element can contribute value to the business.

Both art and science

Derek stressed that there is as much art as there is science in his approach. He acknowledged that he had not devised a simple mathematical formula where an objective value was produced. Instead he recommended that the model be used more as a magnifying glass. He saw its worth as more of enforcing a discipline that recognises the wider context of the benefits that will arise from an ICT investment. He appreciated that the associated values arising from each element in the tripartite model are subjective and are likely to vary depending on circumstances. Nevertheless, the examination, forced by the application of the tripartite model, forces the organisation to highlight where an ICT investment may generate intangible value to the business.

Derek's work was accepted by the Australian Government Office of the CIO and AGIMO. Nevertheless, he recognised that his research is work in progress and he was keen for input on how the tripartite model can be enhanced. To this end, he established a discussion forum to facilitate the dialogue at www.govdex.gov.au. I would also encourage you to Google his name to get more detailed information about his work. Derek, unfortunately, never lived to see this discussion and his work blossom. Nonetheless, I suspect that his legacy may well be that ICT begins to better articulate the significant value it creates for the business.

Peter Hind is a consultant with many years of experience in the IT industry.

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