Estimating the Benefits of MDM
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How can you estimate the benefits of MDM?
When building a business case, you must be able to explain and estimate the benefits. But this is more complex than it appears, since benefits are often divided into two categories: quantitative and qualitative. Quantitative benefits (“hard” benefits) are those that can be estimated from cost savings, enabling new revenue opportunities, or avoiding scenarios in which a revenue opportunity will be lost (e.g. customer churn).
Qualitative benefits deal with “softer” aspects like reputation risks, compliance issues, etc.
In reality, there is no wall between qualitative and quantitative benefits. Some benefits considered quantitative may be difficult to evaluate for a given company in the context of its current business processes.
On the other hand, benefits traditionally placed in the qualitative category can sometimes be evaluated. For instance, benefits of improved compliance (see “The ROI of Master Data Management” by Rob Karel, Forrester Research, October 29, 2008) are sometimes estimated in terms of avoided penalties that an enterprise could suffer without the improvements promised by MDM.
It is difficult, however, to quantify the cost of corporate scandals and the ruined reputation of a company and its top executives, along with potential legal consequences.
From the business case methodology perspective two high level approaches can be used to estimate an MDM impact:
- A traditional bottom-up approach – this approach quantifies MDM benefits by performing in-depth analysis of the current state processes, identifies their inefficiencies and develops an ROI model by showing how MDM can reduce costs and increase the revenue
- A less traditional Economic Value (EV) approach – this approach provides a high-level estimate for the business impact of MDM and other information-centric initiatives
Next week, we’ll examine the traditional bottom-up approach.
This is part of Larry Dubov's series, Building a Business Case for MDM. Visit the table of contents for any posts you may have missed.
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Lawrence, I look forward to this thread.
Bottom up and Economic Value evaluations have always played a pivotal role in large initiatives like MDM.
What is your thought on the hybrid approach of the two methods ? you said, "here is no wall between qualitative and quantitative benefits." In your opinion, has a hybrid approach worked ? and is there a benefit in doing both evaluations, and presenting the "value" from both angles ?
I see value in both evaluation methods, but can a mix of the two really help business leaders latch on to the message and take ownership, or will it only confuse the business, in that "no matter which way you implement MDM, you will have benefits"...in my experience, if every avenue of approach is beneficial, it has always stalled the momentum... because there is no clear path...
Thanks again, and I look forward to your future posts.. always good to read your posts.
Lawrence,
This is an excellent subject and I will enjoy reading the sequels of "Estimating the Benefits of MDM". To add more complexity to quantitative (hard savings) and qualitative (soft savings) I find that if you are building the benefits model, you need to incorporate departmental focus. For instance within supply chain / purchasing hard savings are easily documented for a reduction of duplicates records in the system or a reduction of suppliers that sell the same item permitting the buyer to negotiate a cost savings base of volume. A MDM solution benefit for a maintenance focus would be the "right part, at the right time" or a functional spare part identified as part of the data governance structure to minimize down time of a manufacturing line. How is a cost avoidance number estimated in this scenario?
Jackie,
I totally agree that departmental focus and acceptance are important.
Cost avoidance can be estimated in a number of ways. The most widely adopted method is thru
• SLE is the single loss expectancy (expressed as the monetary value of the loss).
• ARO is the annualized rate of occurrence.
• ALE is the annualized loss expectancy.
Using these variables we can define the following expression for cost avoidance calculations:
ALE = SLE x ARO.
You will need to understand business process to estimate these parameters.
That said, you have to keep in mind that a lot of effort can be spent to evaluate cost avoidance for multiple processes. If a business process involves, let's say 5 FTE's and after the MDM implementation you will be able to make it 4 FTE's, 1 FTE is not a huge saving on the budgetary scale typical for enterprise MDM implementations to justify too much time on quantifying cost avoidance. You don't want to overanalyze a process that may give you 35-40k annually in cost avoidance. You need something more substantial. Everything counts though!
You may want to look for bigger economic impacts thru new revenue opportunities.
Thanks,
Larry