The Seven Fundamentals of Value (according to Mohanbir Sawhney)

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.”

4. Value is a trade-off. Value is the perceived worth of something in relation to the total cost that customers pay for it. This definition underscores the fact that value is a trade-off between costs and benefits. I have been a strident critic of measuring IT value in terms of total cost of ownership (TCO). TCO is a vestige of the days when IT was a utility in the back office to be managed at the lowest possible cost. As IT becomes an enabler of business agility and competitive advantage, we need to move the dialogue away from cost alone to the business value of IT. I applaud the work of Gartner and other IT consultants to define what Gartner calls the total value of ownership. By focusing on total value, you can evaluate IT investments as a trade-off between the value created by the investment, relative to the total costs that you can expect to incur.

5. Value is contextual. You cannot divorce the value of an IT system from the context in which it will be used. Consider the purchase of a laptop computer. A salesperson who is on the road a lot and needs to communicate constantly with the home office will place great value on portability and connectivity. On the other hand, a design engineer in the same company who uses the laptop for computer-aided design and works out of the same office every day will value graphics performance and display quality. Unless you understand the end-usage context, you run the risk of creating value propositions and offerings that are irrelevant for customers.

6. Value is relative. Customers never assess value of an offering in isolation. They always consider value relative to alternatives. These alternatives may not be other products or systems, but other ways of accomplishing the same goals or doing nothing at all. An enterprise that is evaluating a CRM system to lower customer support costs and to improve customer retention may consider outsourcing customer care to offshore locations instead. When evaluating whether to upgrade a company’s desktop PCs, the CIO may consider putting off the decision for another year. It pays to understand who or what you are up against because this is the frame of reference that your customers use to evaluate your value proposition. By understanding competing alternatives, you will also be able to focus on points of differentiation relative to these options and ignore points of parity that clutter and dilute your value proposition.

7. Value is a mind-set. Value-based management is more than models or processes. The value mind-set is grounded in the belief that the sole purpose of a company is to create value for its customers and to be compensated equitably for its efforts. Therefore, everything the company says and does should revolve around its customers—not its products. This is a radical shift in perspective, and few companies truly embrace this idea despite their claims of being customer-focused.

In stormy economic seas, value can serve as an anchor by reminding you that every initiative you engage in should be grounded in a clearly articulated customer value proposition. If you focus relentlessly on defining value as customers do, designing your offerings based on what customers value, and measuring your performance in terms of the value that customers experience, you will find your destination. Good luck on the journey.