In economic terms, the business value of an investment (an asset) is the net present value of the after-tax cash flows associated with the investment. For example, the business value of an investment in a manufacturing plant is the sum of the incremental after-tax cash flows associated with the sale of the products produced at the plant. Similarly, an investment in BI creates an asset that must be used to generate incremental after-tax cash flow. Accordingly, BI investments should be subjected to a rigorous assessment of how the investment will result in increased revenues, reduced costs, or both.
Although there are hundreds of ways to express business benefits, no business value is associated with an investment unless the benefits achieved result in increased after-tax cash flows. Again, there is no business value associated with an investment unless the benefits achieved connect to strategic goals. For business, the focus is on primarily increased after-tax cash flows; for government agencies, improved performance and service to citizens. These principles apply to investments in factories, equipment, and BI.
For example, it is common for BI vendor value propositions to emphasize business benefits such as agility, responsiveness, customer intimacy, information sharing, flexibility, and collaboration. But investing in BI to achieve such business benefits may actually destroy business value unless those attributes can be defined in operational terms and realized through business processes that affect revenues or costs. For example, a $2 million investment in a BI application must result in incremental after-tax cash flow of at least $2 million or the organization will suffer a reduction in assets.
To illustrate this point, many companies use BI to improve customer segmentation, customer acquisition, and customer retention. These improvements can be linked to reduced customer acquisition costs, increased revenues, and increased customer lifetime value, which translate to increased after-tax cash flows. However, a BI investment that improves demand forecasting will not deliver business value unless the forecasts are actually incorporated into operational business processes that then deliver reduced inventory, reduced order expediting costs, or some other tangible economic benefit. In other words, the business benefit “improved forecasting” is useless unless it is somehow converted into incremental after-tax
cash flow.
Looked at more broadly, the quest for delivering business value via BI can be seen
as a matter of determining how an organization can use BI to:
Although there are hundreds of ways to express business benefits, no business value is associated with an investment unless the benefits achieved result in increased after-tax cash flows. Again, there is no business value associated with an investment unless the benefits achieved connect to strategic goals. For business, the focus is on primarily increased after-tax cash flows; for government agencies, improved performance and service to citizens. These principles apply to investments in factories, equipment, and BI.
For example, it is common for BI vendor value propositions to emphasize business benefits such as agility, responsiveness, customer intimacy, information sharing, flexibility, and collaboration. But investing in BI to achieve such business benefits may actually destroy business value unless those attributes can be defined in operational terms and realized through business processes that affect revenues or costs. For example, a $2 million investment in a BI application must result in incremental after-tax cash flow of at least $2 million or the organization will suffer a reduction in assets.
To illustrate this point, many companies use BI to improve customer segmentation, customer acquisition, and customer retention. These improvements can be linked to reduced customer acquisition costs, increased revenues, and increased customer lifetime value, which translate to increased after-tax cash flows. However, a BI investment that improves demand forecasting will not deliver business value unless the forecasts are actually incorporated into operational business processes that then deliver reduced inventory, reduced order expediting costs, or some other tangible economic benefit. In other words, the business benefit “improved forecasting” is useless unless it is somehow converted into incremental after-tax
cash flow.
Looked at more broadly, the quest for delivering business value via BI can be seen
as a matter of determining how an organization can use BI to:
- Improve management processes (such as planning, controlling, measuring, monitoring,
and/or changing) so that management can increase revenues, reduce costs,
or both - Improve operational processes (such as fraud detection, sales campaign execution,
customer order processing, purchasing, and/or accounts payable processing) so
that the business can increase revenues, reduce costs, or both