How do you calculate value?

How do you calculate value?

IT value is an outcome that can be expressed as a transaction; a summation of debits and credits resulting in a number.   Unfortunately, even if we can create a specific formula, the interpretation of the number is problematic.   Measures of the economy of inputs, the efficiency of the transformations and the effectiveness of specific outputs are components of a value equation, but they only go so far.   I would like to suggest that customer satisfaction makes interpretation of value possible.

Those that receive the service determine the value, therefore value is specific to the project or service. In order for value to be predictable, you must assume that there is a relationship between how the product or service is created and the value perceived.  When we are assessing the value delivered by an IT department, which is part of a larger organization, it is rare that we are allowed the luxury of being able to declare that the group we are appraising is a black box.  Because we can’t pretend not to care about what happens inside the box or process, we have to find a way to create transparency so that we can understand what is happening. For example, one method is to define the output of the organization or processes.  The output or product can viewed as  a synthesis of inputs, raw materials and process.  The measuring the efficiency of the processes used in the transformation process is a typically measure of value add. The product or output is only valuable if it meets the users need and is fit for use. Knowing the details of the transformation process provides us with the knowledge needed to make changes. While this sounds complex, every small business has had to surmount this complexity to stay in businesses.  A simple value example from the point of view of a restaurant owner follows.

  • A customer enters the restaurant and orders a medium-rare New York Strip steak (price $32.00)
  • The kitchen retrieves the steak from the cooler and cooks the steak so that it is done at the proper time and temperature.  (The inputs include requirement for the steak, effort of waiter and kitchen staff.)
  • The customer receives a medium-rare New York Strip steak

From the restaurant owner’s point of view the value equation begins as the price of the steak minus the cost of steak, preparation, and overhead.   If the cost of steak and servicing the customer was more than the price charged, an accounting loss would have resulted and if the costs were less  . . .  an accounting profit.  The simple calculation of profit and loss provides an important marker in understanding value, but it is not sufficient.   For example, let’s say the customer was the restaurant reviewer for a large local newspaper and the owner comp’ed the meal AND the reviewer was happy with the meal.  The owner would derive value from the transaction regardless of the accounting loss from that single transaction.  As I noted earlier, customer satisfaction is a filter that allows us to interpret the transaction.   Using our example, if the customer was unhappy with his or her steak the value derived by the restaurant will be less than totaling of the accounting debits and credits would predict.  While a large IT department has many inputs and outputs, I believe the example presents a path for addressing value without getting lost in the complexity of technology.

In a perfect world, IT value would be established in a perfect market place.  Customers would weigh the economy, efficiency, effectiveness and customer satisfaction they perceive they would garner from a specific development team to decide who should do their work. If team A down the could do the work for less money and higher quality or deliver it sooner, they would get the work.   Unfortunately, perfect market places seldom exist and participants could easily leverage pricing strategies that internal organizations would not be able to match.  The idea of a project level market place has merit and benchmarking projects is a means of injecting external pressure that helps focus teams on customer satisfaction.

Measuring IT value, whether at a macro or project level, needs to be approached as more than a simple assessment of the processes that convert inputs into products or services that the business requires.  Measure the inputs and raw materials, measure and appraise the processes used in transformation and then determine the user’s perception of the output (where the customer and user are different you need to understand both points of view).  Knowing the value of all of these components while having your thumb on the filter of customer satisfaction will put you in a position to not only determine the value you are delivering (at least over the short-term), but to predict how your customers are perceiving the value you are delivering.  Remember forewarned is forearmed.