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Justifying MDM often requires finding more revenue opportunities

In the marketing segmentation scenario we explained that cost savings from improved mailings did not provide enough justification to make an MDM project profitable. This is not unusual: in addition to cost savings, new revenue opportunities are required to justify the investment.

Cost savings can be achieved through a reduction of resources involved in the problem domain or process. The top resources that can provide savings include:

• FTEs  - thru a reduced administrative overhead, better process automation, organization and improved productivity
• IT infrastructure (hardware) costs through a better architected data redundancy that that will replace the current state application silos where master data may reside in a chaotic state

The team responsible for the MDM business case should be prepared to answer CFO’s questions, such as:

• You say that we will be able to reduce the number of people engaged in the current process. Can you be more specific about how many employees or temporary workers will be terminated or moved to other positions? Which roles will become obsolete?
• Which infrastructure components we will not purchase if we purchase MDM?

These questions can put the MDM business case team in a politically difficult situation, especially as it relates to the opportunity for FTE reduction.

Indeed, let us estimate how many FTEs should be released from the process to make an MDM investment profitable. Assuming the annual FTE cost $50k per employee, in order to break even with the MDM investment defined above we will need to reduce the work force by 23 employees immediately in order to break even in 4 years!

This perspective may put you at odds with many people in your organization and defeat the idea of MDM.

This emphasizes an important point. In many scenarios, cost savings alone may not justify the investment.

You should be prepared to inspire the organization with new revenue opportunities enabled by MDM to make the business case hold. The business should be willing to champion the ideas of new revenue opportunities enabled by MDM.  This may enable a new business strategy that will help justify the business case for MDM.

A Caveat and an Example

However, there is a caveat. In a number of projects, a business case was originally defined in terms of savings achieved through reduced mailings. Later, when the project went into production, the enterprise chose to keep the number of mailing the same while benefiting from significantly improved quality of marketing campaigns that brought significant incremental revenues.

Some companies, after in-depth analysis of their processes, came up with the cost of a duplicate master record between $20 and $60 per record. This is two orders of magnitude higher than a cost of a duplicate mailing. This is another indication that those easy quantifiable benefits provide only small fraction of the real value MDM can provide.

The cost of $40 per duplicate can be used as a rule of thumb for high level estimates if a detailed business processes analysis has not been performed by the enterprise. This estimate works well for the enterprises where the number of customers is large, greater than 15-20 millions of records.

As we can see, a business case built from the bottom-up can vary greatly in complexity. A relatively easy scenario can boast one or a few specific and easily quantifiable problem domains justify an investment. Meanwhile, more complex situations may require both a long list of cost avoidance scenarios and multiple revenue opportunities to validate the business case for MDM.

Regardless, the key is to determine the economic value and share it with stakeholders. We’ll continue on this path next week.

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.