When it comes to adding muscle to business cases, there is an unjustified fear of measuring what are considered intangible benefits. But a more astute handling of intangibles—those goals that can’t be easily measured in dollar terms—can provide a big boost. Too often, eligible but soft potential benefits are not assessed as valid results. To help your business cases be as strong as possible, here is a closer look at how to maximize the inherent power of intangibles.
One reason that intangibles deserve more respect is that they are now a significant part of a business’s worth. More than 25 percent of the value of enterprises is now based on intangible assets, such as brand image and market share, according to economists. But decision-makers have not yet accepted this financial reality. Burned by failed project implementations, and noting that such projects had a heavy dependence on intangible benefits, they jump to the erroneous conclusion that all intangibles are bad. Unfortunately, when business cases are devoid of intangible analysis, projects vital to the enterprise go unfunded because intangibles can’t add to the hard number ROI. Strategically marginal projects showing a high ROI (often because the investment is small) get the money. Such misguided project investments can undermine critical strategic goals, such as improvement of market share and sharpening of competitive advantage.
The first step in fighting that and getting the proper respect for intangibles is to clarify terms: When used in business cases, intangibles are IT investment payoff areas not expressed in monetary ways. “Less frequent use of temporary workers makes hourly employees feel better” is intangible if no believable dollar impact is shown. Conversely, “Less frequent use of temporary workers will save $100,000 annually in labor costs” is tangible when expressed in believable dollar terms.
Here are three dangerous myths that undermine our quest for delivering value.
Myth No. 1: Intangibles Always Remain So
A major reason why intangibles are held in disrepute is that they shouldn’t be intangibles in the first place. In my experience, as much as 75 percent of the intangibles cited in business cases could have been converted into tangibles. Here are three examples of ways to flip these “false intangibles” into brawny goals: 1. Follow the data; 2. Ask those who know; and 3. Find the cause of silence.
“Follow the data” means uncovering hidden tangibles’ payoffs by looking at better decisions available to users of new, improved information. For example, a CFO I know found more than $1 million in savings from an improved financial system only when someone pointed out that many store managers were compensating for out-of-date sales figures by over-scheduling expensive discretionary labor on the store floors.
Another way to convert false intangibles to concrete measurements is to “ask those who know.” By this I mean to uncover often obscure systems benefits known only to those who live the process every day. I met a manager who was determined to justify an improved, although expensive, process for better logging operations in the South. Many people considered such an investment too soft to quantify. Believing otherwise, he traveled more than 1,000 miles to interview logging crane operators on the job. The impressed logging operators bared their souls to reveal major, undiscovered costs the new system would alleviate—such as poorly scheduled hauling vehicles, which reduced the crane person’s productivity through no fault of his own.
A search for the “cause of silence” also provides intangible to tangible conversion possibilities. I once advised a West Coast services organization on value discovery. A manager noticed that the rental cost for construction equipment was skyrocketing while at the same time few requests were being made for identical machines sitting idle in enterprise warehouses. A short investigation later revealed that the construction crews were unaware of the warehoused equipment. A more accurate and timely capital assets system was quickly justified and put into place. In that example, the original intangible benefit was “a new asset management system will help us track our assets better.” Flipping this intangible over to concrete measurement status occurred by eliminating unnecessary rental costs.
Myth No. 2: Intangibles Have No Worth
Many things in our economic life are both highly valuable and quite intangible—the value of the Coca-Cola logo and Wal-Mart’s image with Wall Street come to mind. Factors with an important worth should be central to a business case, even if they aren’t easily quantified.
Myth No. 3: Good Decisions Consider Only the Facts
People who claim their decisions are made “solely on the facts” are expressing hope, not reality. A core skill of senior managers is the ability to make the right decisions in the face of less than factual (for example, intangible) information. The only issue then is whether, at the time of decision making, the use of intangibles is going to be hidden under the table or brought into the light of day. In this era of stronger corporate governance, where visibility of internal decision making engenders stakeholder confidence in management, the latter is definitely better.
Another way to improve our chances of flipping intangibles into tangibles is to better understand the building blocks of easily measured factors. Read on for tips on how to do this.
Using Building Blocks to Convert Intangibles to Tangibles
Tangible business case building blocks typically contain factors such as premise, formula, metrics and reasoning. Often intangibles can be converted by strengthening weak components:
Premise. Avoid controversial premises entirely. For example, a vision that “we will lead our industry in innovation” could be a premise for quantifying the value of a system that enhances new product development.
Formula. Look for other formulas related to the same benefit area. For example, suppose a formula that calculates the value of customer satisfaction based on increased gross revenue is in the business case. If that is too uncertain, instead calculate savings based on a reduction in customer turnover, computing the higher expense of replacing a lost customer.
Metrics. Be creative at finding sources for information. Interview customers, employees, partners, suppliers and industry analysts. Search for Internet studies. The reality: Informed guesstimates drive much of industry’s success.
Reasoning. One of the best bosses I ever had told me, “I don’t care what you are recommending, just why you are recommending it.” He focused me on being precise in my logic (“If this occurs, then this happens because….”).