How does BI add business value?

This simple question should be easily answered by any professional in the field. Unfortunately, it often causes a lot of debate when this question pops around. Consider for example the discussion around the business case for BI on the Computable blog (in Dutch). Although some good points were made, there is in my opinion still a lot of misunderstanding. I will try to shed some light and add some system in addressing this issue.

First of all, added value in financial terms translates into a (positive) discounted cashflow. Cash is something different than costs (or expenses). For example, the investment of a logistics company in a new truck of € 10.000,-, results in a one-time cash-outflow of the same amount (provided that it is paid for in one-term). The company needs to pay the truck dealer, to put it simple. However, the cost of the truck is not the same, but the amount the company choses to depreciate. If the truck is depreciated to 0 evenly during 5 years, the cost of that truck in the same year is € 2.000,-. Just looking by the numbers, that paints an entire different picture.

Financially, a business case should be based on cashflow. So when making a business case for BI, what results in a net positive cashflow? Analyst’s and controller’s time that is freed up because their reports are generated by BI instead of having them to make the reports in Excel, does not result in positive cashflow, unless personnel is laid of. Reduced licence fees because of BI-platform consolidation, does result in positive cashflow effects, because it directly affects annual licence payments. When the investment (cash outflow) to migrate old applications to the new platform are less than the savings, you have a positive net effect. Of course, this is a somewhat simplified example but it just serves to illustrate the principle.

So from a financial point-of-view (which is primarily what a business case is), there is no reason not to deploy a BI-initiative that generates positive net cash-flow just by reducing licence-fees. Maybe not sexy, but certainly financially healthy.

Now, let’s look at the benefits side. There’s often a lot discussion that the benefits of BI cannot be quantified and can only be expressed qualitatively. First of all, one needs to distinghuish between benefits that:

  1. By definition cannot be quantified, for example the even distribution of wealth in a society, and
  2. Benefits that are hard, but not impossible(!) to quantify , like improved company image – or quantified benefits that still have a lot of uncertainty.

In my opinion we’re dealing with the 2nd category, not the 1st. So, we ‘shouldn’t hide but work harder and digg deeper. The key to do this is, is to establish a causal and logical relationship between the solution (BI) and ultimately financial results. Put simply, this entails asking a lot of consecutive ‘So what?’ questions: “A new BI-solution will improve the quality of sales information”, “So what?”. A similar point was also brought forward in the 2003 article in Business Intelligence Journal by Steve Williams and Nancy Williams about the business value of BI. They stressed the need to link BI to management processes that impact operational processes or to link to operational processes directly. For example, segmenting customers is useless unless it is used to treat customers accordingly. In other words, to operationally act upon it. Currently, we’re working at Capgemini on enhancing a technique that supports in finding and establishing these relationships. I hope to publish the ins and outs on short notice.

NB: the contents of this post is based on the Business Case methodology developed by Capgemini

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5 comments on “How does BI add business value?
  1. Stefan says:

    Wouter, I think your explanation of DCF is a wee bit too simplified (http://en.wikipedia.org/wiki/Discounted_cash_flow). But in essence I would agree that you can base a business case on cash flows. However, the key where I would disagree is in the rest of your statement.
    Once you cannot measure/proof the causal relationship (for example company image), I think by definition it becomes a qualitative business case (and there is nothing wrong with that!). “The new BI system will earn us x dollars worth of company image.” Of course you could use statements like that, but I think this has not a lot to do with business cases based on DCF.
    If you have more specific ideas, please post them. Good luck with working out the methodology!

  2. Hmmm..I am tempted to agree with Stefan here. There is nothing wrong in writing a qualitative Business case. Especially in government I think this is a crucial point..getting it quantified is….like…fooling yourself. Simply because the benefits can not be put in cash flow (how would you put ‘more thrustworthy’ in Euros?).

    I think it’s more a matter of entrepeneurship vs. managers…..

    Managers want and demand quantitative cash flows and yes…they fool themselves. But hey – they can be accountable (‘the business case was positive!’)…..Entrepeneurs do not think this way…they evaluate the opportunities, the risks and are especially interested in the qualitative business case (maybe they dont believe the quantitive one?…).

    So…lets replace all those managers in decision-spots with entrepeneurs…

    I am in favor.

    Anyway – do not get me wrong….writing a business case is vital for any programme or project.

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