In today’s business environment an approach that tests only the financial aspects of a potential investment is likely to produce sub-optimal outcomes.
In today’s business climate where stakeholder expectations of business drivers include environmental, customer, risk, safety, and community impacts a concentration on financial return is a simplistic approach to assessment of an investment opportunity. An approach that tests only the financial aspects of a potential investment then ignores the other characteristics that constitute business value so it is very unlikely that the investment will be optimal.
What is of importance to a business changes from business to business and day to day by the nature of the market and the competitive position of the business, core competencies, risk appetite and larger investment strategies etc. For example, a business such as a Superannuation fund or a Government agency will generally have a lower appetite for risky investments than say other businesses. Also, government agencies tend to cherish reputational and community benefit more than other businesses.
Of course, one of the significant issues is how could we compare financial return to something like risk or reputational benefit? How much of one is the equivalent of how much of the other? Even at a superficial level it is akin to comparing apples to oranges.
Multi-criteria decision making (MCDM) utilises the science of Multi-criteria Decision Analysis (MCDA) to provide a structured approach to making decisions through semi-quantitative analysis to determine the potential contribution to the business (or Relative Business Value). Similar to financial benefit analysis (FBA), otherwise known as Cost Benefit Analysis (CBA), MCDM adds a range of non-financial criteria to the mix in allowing more balanced and customer-focused investments to support the achievement of outcomes and objectives.
One issue with being able to compare tangible and intangible is to acknowledge that some are benefits and some a dis-benefits. For example, cash flowing in is generally considered a benefit, flowing out, a dis-benefit, high risk a dis-benefit, lowered risk a benefit, positive reputational outcomes (benefit) have a downside (negative reputational benefit (dis-benefit). So, relative business value is a sum of the negatives and positives, benefits and dis-benefits.
Not all businesses consider the same list of benefits and dis-benefits when deciding what is of value, and each has their opinion of the relative value of each. In fact, by the nature of each person’s role in the organisation, it will be valid for individuals to have divergent opinions of value, e.g. A CEO value share price, a COO values efficient systems that can be operated by low-skilled staff, a CIO values scalability and security, a CMO values reach and revenue. Etc.
So, “Business Value” is defined not only in terms of financial characteristics but also as the appropriate combination of other characteristics, such as risk, strategic alignment, community impact, or whatever any particular business finds to be of value.
In the context of apples and oranges the selection is relatively simple because there are few value measures but in today’s business context there are many, many value measures, positive and negative, and the importance of those value measures not only varying from business to business but from individual to individual.
Want to overcome the complexity and make it simpler than comparing apples and oranges? Talk to the experts at Kepa Software.
