I’ve been working with a lot of my American colleagues recently and they have a colloquial phrase “…..you do the Math”. Despite the missing “s” on the end which may grate against the ear of the English language purist, it is pretty self evident that it means – “work it out yourself”, or more bluntly, “it’s obvious, stupid”
My own favourite Math(s) formula is simple but effective: BV = C x U.
This translates as Business Value is Capability multiplied by Usage.
Business Value is an often used term which is easily misinterpreted as something quite sophisticated. However as a simple (former) Accountant, to me it is quite straight forward. Business Value is measured by a Credit in the P/L account going up, or a Debit to P/L going down. Ultimately it results in more cash being retained within the business than would otherwise have been the case. Sitting on Investment Boards of various companies I have heard many other attempts to define business value, none of which have been convincing. Project Sponsors using terms like “…strategic investment” , “…brand enhancing” “…market entry requirement” are usually precursors to an explanation that this project or activity would actually lose money or drain the cash resources of the company, but that somehow this was a good thing. Call me old fashioned, but to me, business has always been about selling “it” (whatever it is) for more than it cost you, and never running out of cash, ever. The alternatives were exhaustively explored during the dot com bubble and were, in my opinion, found wanting.
Capability is what the IT industry commonly calls functionality. However, at the enterprise level it includes the whole triumvirate of people, process and technology. It represents the capacity to create value (as defined above).
Usage is the extent to which the capability is actually put to use. It could be the volume of actual transactions, the proportion of possible transactions, the proportion of the total value of all transactions, the time spent, or whatever. In the end, it is something to denote how the capability is actually put to use.
This point of this formula is that it can be adapted by all areas of the business to the specific circumstances on hand. It is most obviously used for project business case analysis – to justify the effort for a possible future project or activity. Economists would call this the grandest question of all time – The Resource Allocation Decision. Katherine Tate, the well known UK comedienne, would put it more simply by just asking “Am I bovvered ?”
My experience of such decisions are that they taken more on emotional grounds than equations and analysis. One organisation I observed defaulted to accepting either of two winning arguments
- Our main competitor already does it, therefore we must do it in order to retain parity
- Our main competitor does not do it yet, therefore we must do it now in order to steal competitor advantage
Not very scientific, and it lead to a plethora of unrelated and badly managed projects, many of which either failed to live up to expectations or failed altogether.
But this blog is about Outsourcing, so how is BV = C x U relevant here ?
Well, Capability is derived from the Service Provider and their ability to deliver. In an ITO you would expect to see new capability as:
- New skills eg knowledge of new technology
- Additional capacity eg through use of their own facilities
- Flexibility eg through use of multi client service centres
- Discipline eg through use of SLA’s and Governance models
Usage ? …this should not be a problem because usage would be mandated, and there is likely to be a form of exclusivity for the given services in the contract. Hmmmm, but watch out for the following tell tale signs
- Shadow IT functions
It will not be called that, but you might see “super users” who always seem to know how to get things done by themselves …and the Service provider is always complaining about them. (typically you see the following activities - Report writing; dBase set ups; a few system changes ) - High SLA’s achievement being reported, but low Customer Satisfaction Measures
Thee will be a lot of g eneral comments about how it all takes too long; how it is all too expensive; how business operators can never get things done because the bureaucracy is getting in the way ; how the past was somehow the “Golden age of IT” - IT being bought as “business services” from third parties
Typically links to hosted websites offering services ranging from internal transactions (expenses, employee hiring etc) to actual products for customers.
These are always only found by the IT function after they have gone live and the first call comes to the Service Desk asking for support, or when Finance try to re-classify the invoices as IT costs because there is a budget overrun in the commissioning department.
One organisation I knew examined certain outsourced IT processes and found that it could open a new retail outlet faster than it could order a laptop. Another trawled the Web and found 35 external facing sites that it did not know about.
Behaviour in organisations is like water running down a mountain side, it will always find a way, and it will take the path of least resistance. If your processes are not people friendly, those impacted will find a way round, through, over or under your arrangements. The faster the business cycle, the less patience that there will be – so retailers will simply break processes in order to get goods into their stores; but even a precision engineering company with a penchant for compliance and traceability will generate a well documented “exceptions work around” in time.
So, my recommendations are:
Service Providers:
- Understand your clients business case
…and help them achieve it - Understand what your client thinks that they have bought
This is not always what you think that you have sold - Look for the tell tale signs
Ask yourself if you are easy to work with ….at the detailed level with Betty in bought ledger, not just with Dame Elizabeth the Boardroom
Clients:
- Is your business case being realised ?
When you look for “points of failure”, classify them as either “C” or “U” - Count the process “exceptions”…
If these are, in fact, the norm, then U is probably low - Observe behaviours
Listen to the excuses for non compliance
Conclusion: Without usage, capability is merely potential, not business value.
If BV = Massive capability x zero usage,
then BV is = zero
You do the Math(s) !
