What is “Business Value”
How much should software cost? For iOS and Android apps, the most common answer is nothing. Solid numbers are hard to come by, but it seems that upwards of 80–90% of major platform apps are totally free (usually with ads), free with in-app purchases, or “freemium.” Taking into account those apps, plus browser extensions, plus free and open-source software for Linux, Unix, Mac, Windows, and every other platform you can think of, it’s probably not too far of a stretch to say that the vast majority of software available in the world is, at least to some extent, free to use.
But then there are apps that cost a dollar or two, or five or ten or twenty. And then there’s software that costs hundreds of dollars. And thousands of dollars. And even tens or hundreds of thousands of dollars. Again, no hard facts, but I would not be surprised to learn that there are large companies who pay millions of dollars in licensing costs to IBM, Microsoft, Oracle, and even Amazon every single year.
And that’s just commercially available software. When you consider the amount of custom software that’s written every year, either by outside consultants or internal development shops, it’s easy to see a pretty long, and possibly quite fat, tail to our software cost distribution.
Why is that? Why is some software so expensive when so much of it is totally free?
The obvious answer is that (in very simplistic terms) the software costs more because it’s worth more, that is to say, it has more value. But how do we measure the value of a piece of software?
For games on your phone or tablet, it’s pretty simple. If the game is awesome but the ads are driving you crazy, you pay the couple of dollars to get rid of the ads. Or if you’ve just got to unlock the next level but it’s going to take you the next three weeks but you can get there right away with a $3 in-app purchase, you pay the $3 and win. In these cases, you’ve made a totally subjective determination about the entertainment value of the game. You could’ve bought a beer or a cheeseburger or a piece of cake, but you bought some entertainment instead, because that was more valuable to you.
But what if, instead of looking for a new game to play, you’re looking at some new software for your business? Maybe you need a new order-processing system, or a better way to track your customers. Or maybe you have an aging legacy system that you’re thinking of replacing. Or maybe you’re looking to invest in upgrading or expanding your existing systems. Now the picture gets a lot more complicated. Instead of $2 or $3, you’re looking at $2,000 or $3,000, or maybe $2–3 million. A subjective analysis won’t work here. You need to know, as objectively and even empirically as possible, what value you’re going to get from your investment. There are at least a few ways to look at that value.
Direct, obvious, and probably measurable
“You can’t manage what you can’t measure.” Or so the saying goes. The truth, as with most of the clever maxims you hear in business, is a little more complicated.
That said, to the extent that we can measure the value of a piece of software, it will generally benefit us to have that information. And there are definitely some things we can measure.
Execution outcomes, for example, are often at least somewhat measurable. If you manufacture things, maybe units per time period or costs per unit or so forth. If you provide a service, maybe the number of customers served within a time period. You can measure quality, such as number of defects per unit shipped, number or severity of customer complaints, time to resolve issues, any number of things. Software that creates measurable improvements in such execution outcomes creates business value for your organization, often in real dollars and cents.
An often-overlooked source of business value is reducing the cost of onboarding new hires. If your systems are hard to learn, that means your staff are difficult, and costly, to replace. Software that’s intuitive and well-suited for the particular job can mean shorter and easier learning curves, which in turn means higher overall productivity and lower training costs.
There can also be measurable value in reducing the cost of the software itself, or costs related to running the software. Enterprise software can be very pricey, as we’ve already noted. IBM, Microsoft, Oracle, HP, CA, SAP, and some of the other big enterprise players charge big licensing fees every year. And some of those tools require big-iron hardware. And many of them require admin and dev skills that are scarce and increasingly expensive. If newer software does an equivalent job for a lower cost, the value in that is plain to see.
So if you’re thinking of making a strategic software investment, whether it be new software to automate a manual process, or upgrading or replacing existing software, the good news is there are things you can measure to predict the value of that investment. But it isn’t always as easy as it sounds (not that it sounds easy). To measure the difference between the current state and the future state, we need a baseline. Existing data. How bad is it now, so we can see how good it will be then. Here’s the big “but”: if you’re thinking of investing in new software, it’s probably because you don’t have the software we need right now, so there’s a pretty good chance you also don’t have any good way to collect that baseline data. Or even if you can collect that data, the new software may enable (or require) process changes that make it hard for you to compare old vs. new in a meaningful way.
Is it worth it, then, to even try to measure business value? I think so. On the one hand, bad data is worse than no data; we risk misleading ourselves if we try to extrapolate too much from the data we have at hand. But if we’re smart, if we know our business and the data that drives it, we can still derive a pretty fair evaluation of the business value of a software investment, even from imperfect and incomplete metrics.
But then, if we have that level of competency, if we can see beyond the numbers and understand the intangibles, a whole other realm of measures become available to us. Let’s consider some.
Fuzzy but probably still very real
While I do feel a little skepticism toward the oft-repeated claim that business is moving faster than ever (I think sometimes we just say things like that to make ourselves feel important, or to justify working harder than we should, or to sell motivational posters), the reality is that there are windows of opportunity, and they do sometimes close faster than we would like. Or at least we can’t be sure how long they’ll be open. Or whether, at some point, and probably more likely, they may still be a little open but not wide enough to be worth our while.
So there’s business value in being able to capitalize on an opportunity, to jump through that window at the right time. How do you measure that? I don’t know. There are too many variables, especially looking at it prospectively. Even in the rear-view mirror, it may not be possible to directly measure the value of the opportunity itself. That’s where a certain amount of instinct comes in. In a way, it’s almost like deciding whether to pay for the premium version of the iPhone game. You know what it’s worth it to you.
We mentioned earlier about measuring execution outcomes, the actual facts of how well your operation performs before and after a software investment. But what about the feelings? There’s value there as well. Does the new system let you do basically the same thing, maybe for the same cost, but with a little more style, professionalism, or class? Do your customers care about that kind of stuff? You might be surprised. Or maybe your employees aren’t any more productive, at least not by anything you can measure, but they’re a lot happier with the new system than the old. Maybe it just looks better, or doesn’t do the same annoying things the old system did. Is there value in happy employees? Of course there is!
Going a little deeper into the “philosophy” of discerning business value, there’s an interesting phenomenon that we can’t really plan for or measure, but can lead to unexpected sources of business value: new possibilities. New ways of thinking. New insights. Stuff we didn’t know or didn’t think of before. See, our ability to innovate, to find creative solutions to our problems, is implicitly constrained by the set of possibilities we’re aware of. Sure, we “think outside the box,” but most of us can only see so far beyond the box. New software has a way of changing “the box”, opening up entirely new possibilities for us. Can you measure that? Not any way that I can think of. But the value is there waiting for us, if only we can see it.
A little more concrete, and yet also a little “meta,” is the business value that comes from being compliant with our contractual obligations, accreditory standards, and even regulations. Contractual obligations we can probably sort of measure by estimating the cost of litigation, damages, and injunctive requirements. Accreditation we can at least guesstimate by looking at which of our customers (it could be all of them) require that accreditation. Regulatory, I guess it depends on what we’re talking about, but in general, calculating the value of regulatory compliance is kind of a divide-by-zero error. The law is the law. The value of complying with it is obvious.
There are others: brand value, goodwill, reputation, good relations with regulators (which is different from compliance), and on and on. They’re not usually measurable, but their value is real. But there are other purported sources of business value that we should look at with suspicion.
Speculative or outright imaginary
New isn’t always better. If you were around for New Coke, I don’t have to explain that to you. If you weren’t, well, you may be in the “newer” category yourself. :)
Vendors of monolithic software packages tout how well their software all works together. A lot of the time that’s true, although it’s important to note that, often times, what appear to be monolithic product suites actually began as separate products, even developed by what were previously separate companies, then brought together with some glue and branding. There may still be value in that purported synergy, but the devil’s in the details.
If we’re in an organization with in-house developers, we may (even without realizing it) assume that outside consultants will do a better job faster than we can do internally, hence higher business value. That may be true. But there are a lot of good people working in internal IT for large companies. Not only are they often every bit as competent as any outside consultants you might bring in, they also have a base of organizational knowledge and a certain level of commitment and ownership. And chances are they’ll end up doing a lot of the work anyway, even if you bring in outside help. Sometimes outsourcing is a good idea, but the business value isn’t always any higher than what your internal staff could produce, assuming your internal staff are qualified software developers and IT people.
One last source of possibly imaginary value is whatever’s the big thing in tech media right this very second. You probably don’t need to replace your inventory system with IoT and blockchain. Or maybe you do. But be sure you understand exactly why those technologies will help you. Understand the Hype Cycle, and don’t buy into the Peak of Inflated Expectations.
The most important thing
Ultimately, business value can be a whole lot more subjective than objective. Discerning business value means knowing what’s important — what has value — in your particular field, industry, or organization. If you’re thinking of investing in new software, make sure you’ve thought about that. Make sure you know what to expect: not just what it’s going to cost, but what business value you can expect in return. Only then can you really know whether your investment is worthwhile.
