News Feature

The Seven Fundamentals of Value (according to Mohanbir Sawhney)

By Mohanbir Sawhney

July 01, 2003 — CIO — The mission of this column has been to help readers understand how to create value through IT. For the past year and a half, I have shared my ideas about how value is created, defined, measured, captured and sustained. I hope that my ideas have made a difference. I am now beginning work on a new book about customer value, so this will be my last column. For my closing piece, I thought I would synthesize the ideas I have written about in CIO by reflecting on the nature of value.

Here are seven fundamental lessons I have learned in my decade-long career as an academic researcher, consultant and teacher.

1. Value is customer-defined. Never forget that value is defined by those who use IT and those who pay for it. To understand the true nature of value, you need to get inside the minds and hearts of your customers, whether they’re internal or external. Define value using their vocabulary, not the "feeds and speeds" that you may be comfortable with. For CIOs, that means learning the language of CFOs, who think about return on assets, ROI and net present value, and of business executives, who define value in terms of shareholder value, inventory turns and customer churn. Vendors must communicate the value of their products not in terms of what these products do, but what they do for customers, expressed in a language that customers can relate to. Concepts like "utility computing" and "business agility" may be catchy vendorspeak, but these abstract ideas need to be made concrete and relevant for specific customers and vertical markets.

2. Value is opaque. An important consequence of value being defined by customers is that it is very difficult to quantify. As I have argued in previous columns, to quantify value, you need to understand all factors that customers take into consideration in assessing value, and you have to understand the relative importance that customers place on each factor. In the absence of this understanding, you are shooting in the dark. You need to develop robust customer value models that are calibrated with data collected from customers. Once you understand the factors that specific customers consider when making decisions, and how they make trade-offs, you can develop a better understanding of the value propositions that might appeal to each one.

3. Value is multidimensional. A common myth in business is that IT investment decisions are made solely on functional value—a product’s features and functionality. Value has two other dimensions as well: economic value—what these features and functions are worth to customers in terms of time and money; and psychological value—the emotional benefits that customers get from your products or your company. Consider the value proposition of HP’s Pocket PC-based PDA. According to HP, the benefits of the iPaq are its powerful processor, bright screen, expandability and flexibility—a statement of functional value. But to close a sale, HP must also demonstrate economic value with quantified estimates of improved productivity for end users as well as application developers. And HP must convince customers of the emotional benefits of choosing a device platform that is backed by reputable and financially solid companies such as HP and Microsoft. Functional value is a starting point, but you need to translate it into economic value. And you need to get beyond the "arms race" of functional differentiation by developing emotional appeals that are far more sustainable than today’s latest feature. Consider IBM’s famous proposition: "Nobody ever got fired for buying IBM."