What is the economic value of information when building the MDM business case? (part ten)
This is installment 10 in my series on building a business case for MDM.
The Mike 2.0 methodology, by Robert Hillard and Sean McClowry, discusses an alternate approach to business case justification for information-centric initiatives like MDM.
Instead of tackling the business case challenge bottom-up through an in-depth analysis of business process inefficiencies that can be cured by MDM, the top-down approach introduces an economic value (EV) of information and applies a capability maturity model (CMM) approach.
It is always a challenge to put a dollar value on an intangible asset like information. The EV model approaches this challenge by establishing a relationship between the market value of the enterprise and the value of enterprise information. EV of information is defined as:
EV of Information = P(Information)* Market Capitalization
Where P(Information) is a parameter of the model that indicates what fraction of the corporate market capitalization falls under informational assets. Hillard and McClowry recommend P = 0.2, even though they report that this estimate is fairly conservative. This value was obtained as a result of a number of workshops and interviews with corporate executives.
We have developed and applied this method to MDM. The equation above can be rewritten for MDM as follows:
EV of Master Data = P(MDM) * Market Capitalization
On a number of engagements it was shown that the value of parameter P(MDM) is typically in the range of 0.03–0.06. For example, an enterprise with market capitalization $3B, assuming P(MDM) = 0.04 for the dollar equivalent of the enterprise master data, we obtain $120M. This is what the enterprise master data would worth if master data management is in a perfect shape.
Within the EV approach the enterprise should define 15 to 30 capabilities, processes and problem domains that are to be enabled by the enterprise via MDM.
Figure 2. Economic value approach to information and MDM
For each capability, the current state, the expected target state and the relative importance of the capability are identified as depicted in Figure 2 above. Generic guidance on the definitions of maturity levels (1-5) can be found in numerous books and articles on CMM and IMM.
Rob Karel recommends definitions for the overall MDM maturity, which can also be leveraged as a guidance to define maturity levels for each of the capabilities. We have added maturity level 0 to measure the capability that currently does not exist but is on the enterprise wish list. The enterprise is planning to develop this new capability that can be a new business process or even line of business.
The arrows in Figure 2 indicate that Capability 1 will be enhanced from maturity Level 1 to maturity Level 4 while Capability 2 will be increased from Level 0 to Level 3.
The following formula defines an incremental increase in the market cap of the enterprise when the target capabilities enabled by MDM are achieved:
Where ∑ stands for the summation over all capabilities that will change, Wi and ∆Li are the relative importance and expected maturity level change as a result of MDM.
One of the benefits of the EV approach is that the quantitative model can be built relatively quickly. The capabilities, their current and target states, as well as their relative values are defined within a few workshops with MDM stakeholders followed by the analysis of obtained results.
The EV approach can estimate the values that are practically impossible to evaluate by the traditional method. Even soft MDM benefits like corporate reputation are accounted for within the EV method. Indeed, the market capitalization depends on the company’s reputation and therefore the incremental economic value obtained from MDM will take this factor into account.
MDM economic value workshops with broad representation of key stakeholders bring a great value as a technique that helps the enterprise to develop a common view on why they are pursuing MDM, socialize the value of MDM and build the organizational consensus.
A weakness of the EV method is that it provides only high level estimates. Some companies and their CFOs got used to more traditional ROI and NPV estimates; they may be skeptical about the accuracy of the EV method.
For some capabilities both approaches will be applicable and the obtained quantitative values from the two approaches can be compared. The incremental increase in EV due to MDM is typically 3 to 10 times greater than the total estimated value of the annual benefit calculated by the traditional method. This rule can be used to validate the model and refine its parameters.
The best results are obtained when both approaches are used in combination. We believe that a combination of the methods will become the mainstream technique for the MDM business case evaluations in the future.
Catch up on the entire series so far: