Productivity in the Office and the Factory:
Extract:
Making the Business Case for Change
Extract's Table of Contents:
Peter G. W. Keen is the co-author of Section 2.2 Telecommunications: The Opportunity and the
Challenge, which described telecommunications technology. In the current section, he moves beyond the technology to the justification for undertaking projects. Be advised that this section is written in terms of telecommunications technology. However, the methods and ideas apply to technology-based productivity projects as well.
Keen categorizes various types of investments and shows how to make a business case for each type of investment. He divides business cases into four categories: operational moves, incremental moves, innovative moves, and radical moves.
These categories are of increasing boldness, complexity, and risk. He shows the different business cases that must be made to justify each type of investment, and the base case of "do nothing." It is important to recognize that the "do nothing" case must be considered. Often, the "do nothing" option is much worse than any of the proposals, even if the proposals do not clear the organization's rate of return criterion.
Failing to undertake a project can doom a firm to continuing to produce the proverbial buggy whip. Keen moves you beyond the nuts and bolts of the specific methodologies discussed in the previous two sections. He considers investments for which the traditional cost-benefit calculations are not appropriate or give answers that would ordinarily lead to rejecting a proposal.
Keen's advice is eminently practical. He tells you what information you need to gather and how to present the proposal so that you get "yes" as an answer.
Source: Competing in Time: Using Communications for Competitive Advantage
(Cambridge, MA: Ballinger Publishing Company, 1988).
TRADITIONALLY, investments in data processing and telecommunications have been justified mainly in terms of cost displacement. This largely reflects a historical focus on automating clerical operations. It is also in part a reaction to the often uncontrolled growth in expenditures on data processing in the 1970s and the many unmet promises about the payoff. Senior managers are wary when invited by the information systems department to spend just a few million dollars more.
When telecommunications was almost entirely a telephone and telex utility, cost was the main issue. Service levels had to be maintained, but there were few "value-added" benefits to be gained from the available technology. As telecommunications became a force for innovations that affect business survival it became hard to justify the new investments in old ways. Obviously, though, those investments have to be systematically evaluated and justified. One cannot make the business case for major expenditures on telecommunications by vague talk about "productivity" or "competitive edge" nor underplay the very real risks involved in applying new technology to unproven business opportunities.
Vision and policy again are the starting points. There can be no one way to make the business case. Two extremes are to be avoided: forcing inventions and innovations to be put into a straitjacket of cost justifications and evading the very real problem of how to define business value when payoffs cannot be precisely forecast or benefits quantified.
An innovation like Merrill Lynch's CMA (Cash Management Account) is a radical move. The risks are high. The volumes and benefits depend on customer acceptance. There are few precedents to measure it against. No amount of cost-benefit analysis is likely to convince a skeptical or even a neutral listener. The case has to be made in terms of business trends and market opportunities.
The radical move has to be justified to and by the people at the top of the firm, and the time horizon they must address is a long one. The operational move requires a shorter, more budget-centered view, with decision makers at a lower level.
Rather than think in terms of "the" business case, we need to recognize that there is a range of business cases suited to the spectrum of telecommunications proposals, which goes from operational to incremental to innovative to radical moves.
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Radical moves explore an uncharted business, technical, or organizational area; involve major new commitments and risk; are an act of faith with no guaranteed payoff; and will have a strategic impact on the direction of the business if they are successful.
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Innovative moves involve a substantial increase in the level of commitment; build on current capabilities and experience; are based on a proven concept, though there are significant risks in implementing it; and provide substantial business value if successful.
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Incremental moves are the "next step" in an existing application within proven technology, involve an increase in scale or scope; have some degree of risk, and provide a measurable return on
investment.
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Operational moves are a better way of providing an existing service or handling a standard operation; substitute new technology, equipment, or procedures for old; and involve limited, manageable risk; contribute directly to the "bottom line."
Making the business case involves getting the attention of the right people, marshaling convincing data, and persuading the people to make a choice. The people, the data, and the nature of the choice differ for each type of proposal.
Figure 1 summarizes the sequence of steps.
In a radical move, what this article calls the "vision" is the business case. It sees communications as a means of refocusing key parts of the business. It generally implies substantial potential benefits.
An innovative move might be a pharmaceutical distributor's building the infrastructure for managing inventories and putting terminals in the customer's store, in the same way as did McKesson and American Hospital Supply. The concrete business picture may well come from looking at what other firms are doing.
Incremental moves fit within the existing vision. For the grocery chain Publix, the decision to compete with Florida banks for control of EFT/POS was radical; the decision now to add a new bill-paying facility to its ATMs would probably be seen by its managers as incremental. Here communications adds a service or does something in a better way.
By definition, an operational move also fits within existing planning assumptions and organizational procedures. It does the same thing better. In the case of Publix, this might be an upgrade of the ATM equipment. Obviously, there is no point in even trying to justify a radical move if the vision is not clear and has not been successfully communicated by management.
CHANGING THE RULES OF THE GAME
Policy sets the organizational rules of the game. It defines authority, procedures, and planning assumptions-the constraints within which the business case must be made. It establishes territorial and political boundaries and, above all, delimits spheres of discretion.
The more innovative the move, the less likely it is to fit existing policy. An example is the proposal in a shipping firm to build an integrated communications capability that will handle all feasible aspects of document transfer, electronically link into banks' cash management systems to speed up the complex process of credit payment, and provide certification of ownership of goods. This intersection of electronic document management and cash management involves very complex legal issues and fairly complex technical ones. It costs about $500 to process the documents involved in a typical international trade transaction and a single week's extra delay in getting documents to the right place adds as much as $10,000 just in interest charges on a shipment of 200 cars or a tanker of oil, so that the potential payoff is huge. The business logic of such a proposal for electronic trade management is clear; however, such a radical idea-radical for all but the few firms in the industry that have already shaped such a vision-does not fit in with established lines of authority and responsibility or with capital investment and budgeting procedures.
The telecommunications manager is not expected to propose major changes in business and marketing. He or she is expected to submit investment proposals through the regular planning cycle, and expenditures will be allocated to operating units through a cost recovery formula.
In practice, in many firms the communications manager would not even try to present such a proposal. It makes no sense to stir up trouble by going around established procedures and by intruding on other people's territory. A firm's policy for telecommunications should make it acceptable for technical units to present proposals that have a strategic business impact.
Level and Mode of Justification, and the Panel of Judges
The business case is presented to a panel of judges-real people who have to be persuaded. Some of them are not part of the formal decision-making process but their opinions have informal weight. Before designing the presentation of the business case, one has to ask
Who can make the decision; which group or individual must provide the authority, resources, and commitment needed to turn this idea into action? Who are the
opinion leaders these decision makers rely on, to whom they turn for formal or informal review? These people can provide support and influence for the move. What approvers must one have? These are the people who can in effect veto the proposal, who must at least indicate their non-opposition if the proposal is to have a chance of being accepted. What kind of data is needed to make the case?
Generally, the decision makers will be a business manager or committee of managers, and the opinion leaders, respected planners or outside advisers, and the approvers financial and technical staff. The exact composition of the panel of judges depends on the type of move and the specific organization. As Figure 1 suggests, as one shifts down the spectrum from radical to operational moves, the relevant data needed to make the case become more specific and cost-focused. At the extreme of the scale of innovation, the key data presented to senior decision makers are trends and pictures from the industry and marketplace. At the other end of the spectrum, the relevant data are precise analyses of cost and volumes, to be reviewed by the people whose budgets and operations are most directly affected. This point is central. Appropriate data must be presented to appropriate people.
BRIEFING AND EDUCATION
Telecommunications and business strategy is anew field for everyone. Managers lack the experience and the training to handle it and most of them never expected to have to make decisions about applying communications. If they have not been briefed well before the proposal is presented and do not feel comfortable in taking part in the evaluation process, it is too late to change the situation. Education has to start early and be sustained.
The needs vary. For radical moves, the aim is to raise consciousness and establish a business focus; the workshop and reports should be filled with examples from industry and analysis of trends in the industry; the technology is related to these, not the reverse. Innovative business moves need a sharper focus and a framework for planning; the business relevance of major options and trends in the technology has to be highlighted; the goal here is to help businesspeople feel they understand the key planning issues. Incremental moves are focused on the proposal, not the broader marketplace and technology; one needs to highlight the relevant choices and tradeoffs. For operational moves the vocabulary and concepts needed to assess the proposal must be clearly defined; the focus is on briefing not education, on specifics, not concepts.
The steps described so far (see Figure
1) all precede the actual presentation and evaluation of the proposal. They are all too often neglected but are essential in establishing the context, criteria, awareness, knowledge, and vocabulary. Without all this being done, how can complex new applications of risky technology and business payoffs that go beyond cost displacement ever be adequately assessed?
By far the most common questions communications managers ask in discussions of strategic planning are: How do I get my senior managers to listen? and What do you do when they are only interested in the cost? The answer is to focus on vision and policy first, and build your education strategy well before you present your proposals. The questions can be restated to apply to senior managers: How should I be thinking about telecommunications? and What should I look at besides cost?
Presenting the Proposals
The uncertainties intrinsic in innovation make it essential not to get locked into presenting, and then having to defend, a single proposal. Equally, one must face up to and even highlight risk rather than downplay it. The more innovative the business application, the fewer the precedents against which to compare it. The greater the likely payoff, the greater the likely risk. The decision to make an innovative or radical move is a business decision about return and risk. The real issue is how far along the spectrum of risk and return management is willing to go, not whether to say yes to one specific combination of the two.
This is something too many data processing managers overlooked in the 1970s. They generally presented their senior management with a single proposal and rarely stressed the risks involved. This damaged their credibility and put them on the defensive. They had to respond to questions about risk with "yes, but" or discount the problem. To do otherwise meant the proposal being turned down.
A far better approach is to say "This is our preferred option. It has these risks and potential payoffs. Here is an alternative that has either less risk or less return. You choose." "You" means the panel of judges; the telecommunications manager has to give them a real business decision to make, not a go/no go response to a single proposal.
There is generally, for any one business opportunity, a wide range of technical options and levels of commitment. Obviously, it makes no sense to look at all the combinations. A much more effective approach is to narrow the analysis to three or four key alternatives:
Do nothing, a real option, has to be evaluated systematically.
The "ideal" alternative assumes the best of all worlds-things will work out as planned, market assumptions will be correct, the technology will work, etc.
A few options between these extremes. One of them will almost certainly be the one recommended by the communications manager and should be flagged as such.
Based on these options the implications of changes in key factors can be analyzed from the start.
VALUE ANALYSIS
The formal proposal for any major investment must look at both cost and value. Generally, they are compared directly; however, until the value is established,
any cost is disproportionate. Too often, as well, the costs are quantitative, predictable, and immediate and the benefits qualitative, uncertain, and deferred. Business inventions cannot be cost-justified, nor can direct and simple comparisons be made between cost and benefit.
Innovation is value-driven. There is a wealth of empirical data to support this point. The principles of value analysis are:
- Separate benefit from cost. Establish the benefit first (Ask: What this worth?). View cost as a threshold (Ask: Would I pay, $X to get this benefit?). Face up to qualitative benefits. Rank order "hard" and "soft" benefits. Define key indicators by which qualitative benefits can be evaluated. Use "bouncing" to get a rough estimate of needed and likely benefits.
Often, in companies using telecommunications to gain a clear business advantage, cost displacement was not an expected or intended priority. Because automation in general, and telecommunications in particular, have traditionally been viewed in terms of cost, it can be hard to shift the perspective. Organizations are far more skilled in cost analysis than benefit analysis. The way to begin to change this is to learn to list, track (through pilots), and rank benefits.
THE DYNAMICS OF INNOVATION
Innovations are made by organizations on the basis of value. The early adopters differ from the late ones. They focus on a small number of benefits, which usually relate to a specific "felt need" with a definite time horizon. They are rarely interested in "office automation" or "productivity" but in getting the budgets in on time, seeing where they can improve short-term forecasting, or keeping the sales force better informed about inventories and prices. Innovators are not risk-takers. In fact, they tend to be skeptical about wild claims and do not respond to "technology push."
Many surveys show that most product innovations come from "demand pull" - the definition of a need in the marketplace to which the technology is then adapted. Technology does not create needs, though education about its capabilities and availability may. Quite often, knowledge about the technology is brought to the innovator by "gatekeepers," who bridge the two cultures of business and technical expertise; academics and planning staff often play this role.
Technical specialists too often think in terms of technology push. That is a solution looking for a problem. The approach to telecommunications and business strategy recommended throughout this book is to focus on the benefits in terms that are convincing to innovators-businesspeople who combine healthy skepticism about technology and open-ended promises with the willingness to put authority and resources behind a project once they are convinced. These are the people who can change the terms of reference for telecommunications. There are three ways to do so:
- Focus on exemplars; these are proven and concrete illustrations of benefits and opportunities.
- Define the business vision for telecommunications.
- Focus on the benefit side of the cost-benefit calculus.
This does not mean evading the issue of cost, but knowing where to put the emphasis. For radical moves, a strong focus on value is called for, with costs defined in terms of a floor: at least $X, probably $Y, and no more than $Z; once the benefits have been defined and management is convinced, then a follow-on study can look at the costs in more detail. For innovative moves, emphasize value but also be more detailed in indicating cost components and ranges. For incremental moves give equal weight to benefit and cost, but treat them separately and in that order. And for operational moves, be very precise about costs ,since that is the issue here; the firm does not need to make the change and the real benefit is the cost impact.
TECHNOLOGY ANALYSIS
The risk inherently involved in information technology should be highlighted rather than smoothed over. As with investment in stocks and securities, high return generally implies high risk. With telecommunications, getting a strategic edge means doing something earlier than one's competitors, which may involve using a technology that is not fully proven. Value analysis establishes the return from the investment. Business managers can assess the business risk, the likelihood of getting the return, but cannot intuitively do so for the components of technical risk, which include the technology itself, the product, and the vendor. Detailed risk factors which apply to all three of these are:
- Performance. How likely is this to work as promised?
- Delivery. Will announcement dates and delivery schedules be met?
- Substitutability. If there are problems, can an alternative technology, vendor, or product be substituted without too much delay and cost?
- Regulation (especially key internationally). What is the likelihood of government (for example, PTT) regulation constraining acquisition, use, or even performance?
- Control. Are we dependent on the vendor or regulators if there are problems or changes?
- Costs. How reliable are our estimates of costs and cost trends? Are there indirect costs we cannot predict such as tariffs?
This list of risk factors is not complete, and the technical staff will have to go into far more detail in their planning and analysis. The goal here is not to produce an exhaustive technical analysis but to give the panel of judges a complete enough picture of the likely risks to be able to trade them off against the likely returns and to feel comfortable that they have been properly briefed.
FINANCIAL ANALYSIS
It is only after the issue of value has been established that cost can be brought in, and even for operational moves value and cost should be kept separate. This flies in the face of traditional approaches to cost-benefit analysis but is surely the only sensible way to handle innovative business proposals that rest on technology. Bundling costs and benefits together, trying to express uncertain qualitative benefits directly in terms of cost displacement or avoiding the problem entirely, simply muddles the issue. This in no way means one need not be rigorous about cost. The overall issue is handling uncertainty and establishing business value. This means be rigorous about value, be rigorous about risk, then be rigorous about cost.
Being rigorous about cost means focusing on cost dynamics rather than cost estimates. In most instances where a proposal for telecommunications introduces a new service, it is close to impossible to estimate volumes. In many instances, supply creates demand and companies consistently underestimate volumes sometimes because they previously overestimated them. An example is electronic mail.
Company A estimated demand would be fairly low; this was based on the assumption that 10-20% of phone calls and memos would be shifted to the new medium. It turned out to be very high in one division because the sales force found it an entirely new and effective way of keeping in touch with the office when they were on the road. In Company B. use was far lower than predicted on the basis of a pilot because project users were charged for the service whereas in the pilot study it had been free. In Company C, use was initially low but took off rapidly when a new software package was installed which made it simpler and easier to use.
Cellular radio, voice mail, full-motion videoconferencing, home banking, network information services . . . There is a flood of new technologies and new services where supply mayor may not generate demand, cost and ease of use may change customer response, or peoples learning may open up new applications. In many instances the hope is that demand will be far higher than predicted-that the productivity gains from videoconferencing will lead to the rapid substitution of telecommunications for travel, or that distributors will enthusiastically adopt the dealer order entry system, or that the new all-in-one reservation system will be a winner.
For all these reasons, it will often be impossible to predict volumes and hence costs. The two key questions then are:
- How do costs change with volume?
- Would we rather overestimate demand and have unused capacity or underestimate it and not be able to meet demand?
The second question is a key business issue. It can be rephrased more specifically: We expect that about 200 customers will sign up; if we get over 1,000, we will be unable to accept them without significant degradation in service. If we get only 70, we will be operating at a loss. Which direction of risk do we choose - oversupply or
under-capacity?
Costs do not necessarily (or often) increase directly with volume. There are many components which have a fixed capacity, and expansion involves additional capital investment. For example, a communications switch can handle a given number of terminal "ports"; when that limit is reached, new capacity must be added in multiples of ports. The dynamics of cost are thus shown in
Figure 2.
The costs may be significantly affected by changes in tariff structures and rates. The use of private facilities and satellites may suddenly become less cost-effective when a foreign PTT or U.S. supplier switches to "volume-sensitive" tariffs or reduces costs for terrestrial circuits. This is a growing problem; not only can we not predict volumes, but we may be wrong by a large margin in our assessment of cost trends.
The problem of projecting costs will not go away by ignoring them. We need to summarize them in terms of "If the capacity is X and the volume Y, the likely total cost is Z." The issue is not cost per se but net business value. For a firm that wants to use its communications capability to deliver products electronically, cost is only part of the calculation. But in each instance, the business questions are:
- What is the likelihood of particular traffic levels?
- What happens if the estimate is wrong? Would we rather err on the side of having too little or too much capacity?
Only management's panel of judges can choose the preferred risk direction. That is a central issue for telecommunications when the traffic has significant business value, or the relative costs are high, and in either instance volumes cannot be predicted. The telecommunications manager can highlight the technical risks and show the net business value for given traffic and capacity levels, but it is not his or her job to make the final decision, only to present the business case.
GIVE US A REAL BUSINESS DECISION TO MAKE
In practice, the business case is too often made in terms of cost and cost recovery, of single proposals, and of technical issues. That does not make sense, except for simple operational moves, and it locks out business innovation through telecommunications. Communications managers have to work through the stages outlined in
Figure 1 and create a business-focused dialogue, as do business managers.
If there is no vision, how can existing policies be challenged and changed, so that opportunities for radical and innovative moves can be brought into top-level planning circles? If the policy for telecommunications cannot be changed, how can anyone step outside or around the existing justification process? If communications managers cannot influence the justification process, how can they find and convince the right panel of judges? If they cannot brief or educate the judges, how can they present their cases?
Senior managers can change policy and procedures far more easily than technicians. The strategy for making the business case presented in this chapter is the process that top managers can and should encourage, rather than the one that communications planners should maneuver to facilitate. The demands from senior executives to their communications staff then should be: "Highlight the uncertainties" and "Give us a real decision to make."
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