There are equal measures of art and science to factoring the intangible benefits of IT investment decisions into a business case.
By Jack M Keen and Bonnie Digrius
Excerpted with permission of the publisher, John Wiley & Sons, from Making Technology Investments Profitable: ROI Road Map to Better Business Cases, by Jack M Keen and Bonnie Digrius. Copyright 2003 by John Wiley & Sons.
Want to inject some life into an otherwise subdued meeting about IT project selection? Take an emphatic stand for including intangibles as a fundamental element of the decision-making process.
Intangibles are an emotional enigma to IT investment decision-making, and there are many different opinions on what to do about the nonquantifiable benefits put forth in defence of making an IT investment. Some of the typical opinions include: “They should be an integral part of credible IT project selection. They should be used as a tiebreaker only. Ban them entirely — they reflect wishful thinking. They are the only true decision factors and thus should drive everything.” Not surprisingly, many decision teams, evaluation committees and business case members end up confused and frustrated concerning the approach they should take with such soft benefits.
Intangible has many meanings, depending on the context of its usage and the intention and viewpoint of the speaker. To a financial analyst, an intangible is an asset for which there are no generally accepted accounting standards that allow it to be quantified. “The premium we paid over the book value of our most recent acquisition is carried as an intangible on our financial statements.” In that case, something is intangible by regulatory decree, as determined by government or industry regulatory bodies.
To a football fan, an intangible is that mysterious, unexplainable factor that enables one team to beat another. “Our team has always beaten the opponent whenever we’ve played on the home field. This gives us a real intangible advantage.” In sports, intangible is a personal opinion, which may or may not be challenged.
To an IT project selection team member, an intangible is a benefit arising from a proposed investment that is not or cannot be expressed in monetary terms. “Implementing this IT project brings a key intangible benefit — a vastly improved image of our organisation with its customers, partners, investors and future employees.” Within the context of IT investments, intangibility is a hot, disputed and often confusing issue for the following reasons:
- The definition of intangibility is widely misunderstood and thus often misused.
- There is no central authority to decree a standard definition, so the opinions flow freely, whether they are informed or not.
- Management thought leaders have conflicting positions on intangibles. Upon closer examination, however, those differences are often semantic.
- IT project selection based on a business case analysis could often go one way or another, depending on how intangibles are handled.
Working Intangibles into the Decision
The reality is that using intangibles “as is” is a valid component of effective IT project selection and demonstration of benefits. All decisions in life have an intangible component to them, whether we realise it or not. Carl Jung said it best in 1933: “[Decisions] have as a rule far more to do with the instincts and other mysterious unconscious factors than with . . . well-meaning reasonableness.”
A good deal of business success hinges on management decisions driven by the gut feel of experience and intuition. Alfred Sloan invented the concept of the successful decentralised corporation when he was leading General Motors in the early part of the 20th century. No data, analysis or precedents could conjure for him in advance something that had never previously existed. It was all intangible, and he had the insight and guts to push ahead. Sam Walton had little “tangible analysis” that told him that his Wal-Mart strategy of discounting would eventually overturn the giants of the day, Sears and Kmart.
IT project decisions need intangible input to clarify important differences between alternative courses of action. Is it important to know that Project A will use a vendor with 100 happy customers, whereas Project B relies on a supplier that simply acquired a smaller company, dismissed most of its employees and incorporated the products into its product line? Which is a better investment? That is an intangible call all the way.
The issue then becomes not if intangibles should be included as an integral part of IT project selections, but how. Organisations typically handle intangibles in one or more of five ways:
- Ban intangibles. With this approach, senior management decrees that no intangibles are allowed in making business cases for IT investments.
- Allow intangibles on a case-by-case basis. This is the most frequently used option. Intangibles are allowed into business cases on an exception basis. They are mostly treated as second-class citizens.
- Use individual intangibles as scorable items. Intangibles are encouraged and in most cases are expected.
- Group intangibles together. This approach is used successfully at some organisations. Sets of similar intangibles are grouped together and a calculation is assigned to the group. The advantages of this approach include ease of explanation and the ability for the decision team to exercise a good deal of latitude in determining how much of the logic and calculations it is comfortable with. A disadvantage of this “group” technique is reliance on numbers that are heavy with assumptions.
- Convert as many intangibles to tangibles as possible. Most IT investment decision-makers prefer tangible (hard money) benefits to intangible (soft money) payoffs. Unfortunately, many people actually overestimate the difficulty of “flipping” what seems to be intangible over to a more powerful tangible benefit.
Tangible Genetic Engineering
There are several cases in which decision teams can convert an intangible factor to a tangible: The decision team discovers an analogy with which it is comfortable; politically respected stakeholders endorse the assumptions and calculations; or someone may present an approach to quantification not considered by the decision team or identify a believable and relevant formula for making the calculation.
Converting intangibles to tangibles is made much easier by understanding what differentiates the two. This is called the DNA of tangibility. What makes a benefit tangible or intangible? If a biologist were asked a similar question, What is it that makes a dog a dog or a cat a cat, the answer would be DNA — the genetic code of life that directs living cells to evolve into one form or another.
Tangibility also has DNA — so to speak. If we understand it, it helps us decide what benefits should be tangible or intangible. It also helps us successfully convert intangibles to their more socially accepted cousins — tangibles. The primary DNA elements that distinguish a tangible are a premise or fundamentally held belief, an expression of a logical cause and effect, mathematical formulas to calculate such a benefit, metrics (values assigned to variables) that enable the formulas to be calculated into a monetary value, and citations of proof that support the claims of the previous components.
To successfully convert intangibles to tangibles, keep the following strategies in mind: Look for potential value to the organisation that extends beyond the department that will be the primary beneficiary of the project; have access to people who are intimately familiar with the world of the data users; get influential people to endorse the analysis; and be bold. Put all these elements together into a cohesive and believable story, and a benefit becomes tangible because its intended audience believes it to be. In the final analysis, tangibility is an opinion, influenced by all the things that opinions are shaped by.
The thinking behind the conversion of intangibles to tangibles can be further illustrated by reviewing the tangible version of benefit areas many consider to be intangible. Examples of other intangible concepts that we have seen made tangible include: increasing strategic alliance success, increasing the value of intellectual capital, maximising corporate portal value, reducing litigation exposure, improving the quality of a process, demonstrating customer commitment, placing a premium value on being a “continuous learning company” and making users more self-sufficient.
Managing Intangibles with a Scoresheet
If intangibles will not or cannot be converted to tangibles, the Scoresheet is a useful and popular way to integrate intangibles into the IT selection process. Use the Scoresheet to grade how closely various investment options match each criterion. Once this grading is complete, the total scores of each investment are compared as an indication of the relative value of each to the enterprise.
There are several important principles of tangibles and intangibles to maintain when managing with a Scoresheet:
- Show a balance between the tangible and intangible decision criteria (hard benefits versus soft benefits). The decision team’s judgment concerning the relative contribution of tangibles could be 50/50, 90 per cent tangibles to 10 per cent intangibles, 80 per cent to 20 per cent, 100 per cent to 0 per cent, or anywhere in between. The process by which these splits are set is enlightening for the decision team members. It forces them to think out and then reach consensus on how important a variety of factors are toward influencing their final decision.
- Subdivide intangibles into categories like financial, customer, process, and employee learning and growth. That categorisation enables the decision team to reach agreement concerning how much various factors — all of which have proponents and opponents — will affect the decision.
- Risks are actively incorporated into the criteria. Once the criteria are established by the decision team, then project candidates can be compared by scoring each of them against the criteria.
Because of the importance of using intangibles in IT project selection, and the inherent confusion in doing so, it can be very helpful if the decision team sends a policy memo out to the business units that clarifies the approach the organisation will take in handling intangible benefits. Here are some strategies to help develop a policy for intangibles management:
- Upgrade research skills, such as interviewing and publication searching. Frequently, tangibility acceptance hinges on the availability of metrics. If the team can uncover comparative metrics, such as those tracked for similar companies in similar industries, the deal is often sealed for an acceptable hard-money calculation.
- Be good at focused interviewing. What hinders workers in getting a quality job done? What inefficiencies exist in costly processes? Who is impacted if a certain event does not happen? Pick your interviewees, and find out what they would like to see happen to make them more effective and more satisfied.
- Beat the clock. Searching for analogies, metrics, formulas and related items takes time. Allow enough elapsed time not only to refine any search but to allow the availability of needed interviewees.
- Approach the process with open eyes and open ears. Like Sherlock Holmes, cast a practised eye on out-of-the-ordinary behaviours (such as Holmes’ renowned comment about “the dog that did not bark”) that might give clues toward possible tangibles.
- Be prepared for pushback. Certain types of objections to converting intangibles to tangibles are heard frequently. Be prepared with answers. Here are some examples of anticipated pushback.
Objection: Labour savings do not count. We still have to pay salaries every month.
Answer: Ask them to consider a medium- and long-term view. For example, cost avoidance is a real savings if the enterprise operates reasonably predictably during the time frame of the business case analyses.
Objection: Cannot get any metrics to support the logic.
Answer: Provide conservative “guesstimates”, backed up with explanations of assumptions. This at least gets decision-makers thinking about the possibility.
• Monitor the evolution in business thinking. Attitudes about handling intangibles are continuously assessed by leading academics as well as high-profile business leaders. Follow the business press to learn their latest ideas and applications. Often their papers and pronouncements can be used to help gain buy-in to a more open acceptance of intangibles.
In the final analysis, whether a benefit is tangible or intangible is an opinion. In most cases, that opinion can be influenced by sound research, a clear understanding of the nature of tangibility and tools that make such pronouncements easy to comprehend.
No matter how seemingly compelling a benefit calculation, or how logical an intangible analysis, the acceptance of intangibles by the decision team is by no means a slam-dunk. Someone needs to explain it in a way that maximises the likelihood that decision-makers will listen, understand and agree.
Jack M. Keen and Bonnie Digrius are the co-founders of The Deciding Factor (TDF), a consulting firm specialising in tools and methods for defining IT value. They serve as TDF’s president and vice president, respectively.
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