How do you calculate value?
The ongoing issue with the value debate is its subjectivity; value is a perceptive judgement that must, by necessity of a business case, be quantified, particularly when each project must be signed off by the chief financial officer. And therein lies the problem, says Vince Gill, partner at consultancy firm, Capability Management.
“People like to think of ‘adding value’ as contributing. They understand value to be a proxy for ‘return’ or benefit in some way shape or form, but the tools they are given to use are very cost-centric. They make some large assumptions about an efficiency return and there is not enough focus on what you receive back.”
“The rigour is on the costing — something tangible that people know how to employ through traditional processes. But they’re left wanting because they don’t have a method to measure the value. People then think it’s subjective and unquantifiable.”
Instead of asking, ‘what is this going to cost?’, executives should first ask ‘what are we going to acquire?’.
“If you ask, ‘what is it going to cost?’ and I answer, ‘$10 million’, that really has no meaning until I tell you what you’re going to get for it,” Simms says.
He uses the analogy of buying a car to explain the value proposition.
“When I present to CFO conferences, I ask how many of them own a car. Of course, most hands go up. I show that the costs for a $20,000 car over five years is $25,000 more than if you use public transport and taxis. It’s not a financially beneficial proposition, so why do we do it? Because we value comfort, convenience, prestige and so on.
“There is a lot more to value than just dollars and there are a lot of things we have to do in business to stay in business.”
For Westpac, that meant delaying the integration of its core banking systems with St George Bank’s Hogan platform until 2014 in order to focus on on more customer-facing technologies. “If all we were trying to do is drive down merger costs, we would have gone down a different path,” McKinnnon says.
“Will we be better off when everybody’s on Hogan? Absolutely. But will we be even better off when we have a new online banking platform in the market… when everybody’s running off a common teller platform and leveraging those processes… when our call centres are working off the same platform… when we have better quality information driving our customer reporting [and] our risk management decisions across the organisation? “The answer is ‘yes’.”
Read Part one of CIO Australia's IT value series.
Part two - the problem with the business case.
Download the joint research by Capability Management and the CIO Executive Council.