Sunday, January 16, 2011

Future Enterprise- The Smart Business case

The Director of the Future Enterprise Research Centre- David Hunter Tow, argues the case for a complete reappraisal of the role of the Business Case and the validity of its current methodology.

There is an endemic structural weakness in today’s business case methodology, which is particularly problematic for Information Technology projects. It arises primarily because of the inability of most enterprises to adequately quantify the benefits relating to investment in new services and technologies.

Since the seventies, business and IT management have been stuck in a mindset which hasn’t changed from the time it became obvious that computer hardware and software was continuing to soak up large amounts of an organization’s capital expenditure budget.

And because of the increasing investment required to computerize the operations of a an organization, it occurred to management that it would be a good idea to offer a business case to justify its introduction. From that point to the present day, the mythology relating to measuring the indirect benefits of this expenditure has grown.
At the beginning most justification was comparatively easy. The case for computerizing the early banking, insurance, manufacturing and retail industries could be easily made, by comparing FTE cost savings from redundant staff with the cost of the computer hardware and software and the much smaller number of operations personnel required.

But then came the next generation of computers- client/server distributed systems, networked technologies, real-time operating environments and software that hid the real cost of regular maintenance, customization and upgrades. So it got harder to justify such systems on a cost savings basis alone, once the original legacy back-office savings had been made.

But everyone knew there were major additional benefits associated with up-to-date information and reporting, faster turnaround of accounts, better customer service and improved management decision-making. And from a government perspective, there would be public benefits as well as the quality of service delivery improved.

But how to translate these other ‘soft’, ‘indirect’, ‘intangible’ benefits, which were obvious to everyone, but apparently fiendishly difficult to pin down, into hard cold cash; that could realistically be factored into the ROI.

And then there emerged a rationalization to solve the problem- a dichotomy. The direct ‘tangible benefits’- those offering obvious direct cost savings, like reducing staff or inventory, were the ones that traditional bookkeepers could quantify and management felt comfortable with.
The indirect ‘intangible benefits’- the fuzzy ones, which of course by now were much bigger than the ‘direct benefits’ and could actually justify a major investment, would remain as best estimates. No-one in their right mind would actually attempt to calculate the value derived from improvements in strategic decision-making or customer satisfaction- and then put their signature to it- would they?..

So gradually the mythology of the intangible, incalculable benefit became embedded in the enterprise psyche.

Managers loved it because they could promote their favorite projects without having to seriously justify them. CIOs loved it because any problems relating to the failure of an application to deliver its promised benefits couldn’t be sheeted home to them. Suppliers loved it because that could maximize their sales of the next big thing; sometimes even writing the business case. And if anyone was silly enough to question their integrity, they could check with the other industry lemmings who had invested in the same magic bullet based on a watertight business case and who would never admit to a competitor they had made a monumental investment error.

And lastly, the high priced guru consultancy firms loved it because it was easy to charge an astronomical fee for a complex business case without actually proving the real payoff; and they couldn’t be blamed if the investment turned out to be a dud, because everyone including the CEO had signed off on it. And everyone knew it was impossible to quantify intangibles anyway.

And so the myth of intangible benefits grew. And as more and more technological advances emerged- the internet, software as a service, content integration, virtualization etc, the percentage of hard tangible benefits that could be offset against costs shrank to 20%, then 10%, then 5%, then zero and then wandered off into negative territory.
And not only that, the business case now had to include sustainability and green benefits, many of which also were ‘intangible’.

So lots of sophisticated ‘guestimates’ and fudging with a nod and a wink became the norm and everyone jumped on the bandwagon, from senior management with MBA credentials to junior accountants; all began to succumb to the glib rhetoric, the blind leading the blind.

And this is in an era when the other sciences were going gang-busters- sending orbiters to Mars, decoding the genome, using stem cells to replace organs and AI to smarten the planet’s infrastructure. But of course it was still far too hard and inconvenient to nail the simple science behind quantifying indirect IT benefits.

So to bolster the myth further, the IT business case template was born- a very authoritative document. Just fill in the blanks and let the creative accountants do the rest.
‘What’s you’re best estimate of the benefits realizable from a Business Intelligence, Supply Chain, Marketing or HR system as well as all the other stuff needed to support it; like a new service-oriented architecture, broadband communications network, data warehouses, security software, cloud technology etc.

Well- just pick a number.

But by mid 2000s the fragile house of cards was starting to wobble. The effect of all this ultra-sloppy, lazy accounting was starting to ripple through the enterprise, ending up in the bottom line. Project prioritization, long term planning, essential infrastructure upgrades, all were being distorted- skewed towards projects with short term easy-to-compute benefits, but little else. But now the big-ticket projects, essential to cope with a new world of realtime transaction processing, online sales and automated supply and distribution wouldn’t wait.

Rigorous, realistic intangible benefits analysis is essential to confirm the payoff from these systems- process reengineering to re-energize the organization, improved customer service and pricing to maximize economic value, optimised decision support to leverage knowledge assets and smart infrastructure upgrades to minimize unforeseen disasters.

But on the other side of the universe the environmental and health industries had grasped the nettle thirty years previously and basically solved the problem.

What is the value of a new heart drug? It’s the percentage of lives saved or extended when compared with the old ‘legacy’ or non-existent heart drug. A 10% improvement in lives saved or extended can easily be translated into a tangible increase in productive working hours as well as reduced health care costs. So the reduction in the risk of heart patients dying early becomes the quantifiable benefit and any side effects becomes a cost.

Same with the environment. What are the benefits from the genetic engineering of crops or saving a wetland. If the new genes reduce the potential for disease, then the reduction of risk of crop losses becomes a calculable benefit. If they cause the spread of resistant weeds or insects or can’t handle droughts- then that’s a cost.
If remediating fish spawning wetlands reduces the risk of fish extinction then that’s quantifiable benefit. If it reduces the ability of developers to build more flood prone houses then that’s a public benefit too.

Now back to IT. You say that’s fine for industries like Healthcare and the Environment, where the risks and benefits are obvious. But you can’t translate that approach to trickier stuff like the impact of IT on customer service or management decision-making.

Yes you can!!

The smarter corporate strategists and operations research groups including this Centre have been developing and applying techniques for over twenty years that successfully challenge the ‘intangible benefits’ myth.

They have combined risk theory with decision theory, tweaked it with some additional AI and come up with better enterprise planning, value modeling, system prioritization, evaluation and audit, and service optimization on a continuous basis. The results- a much healthier, profitable and more resilient enterprise.

And this is only the beginning for the future of the dynamic smart business case.

In the 21st century it will be integrated with a host of other new and more science-based planning techniques- risk analysis, forecasting, Bayesian probability networks and AI-based process optimisation algorithms; as the enterprise of the future positions itself to be a largely autonomous entity able to better react, seek new opportunities and re-create itself in a fast-changing and uncertain world.

The smart business case of the future therefore should not be seen as a standalone tool, but as a dynamic and integral part of enterprise planning and modelling. Unless it is applied rigorously, it can distort the whole fabric of the organisation.

Projects and services and products don’t end abruptly. They get absorbed into the fabric of the enterprise as they interweave with other processes, often emerging as part of a new technology or service. The smart business case should therefore be an evolving process also, constantly adjusting to the evolving nature of the enterprise.

It’s therefore high time that the whole crumbling edifice of the mythology of intangible benefits was put to rest and the business case became a lot smarter.

After all- you can’t have a smart enterprise or a smart planet without support from a smart business case.

And it is the 21st century.


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