Chapter 3
Value or Values?
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You can’t communicate complexity, only an awareness of it.
The concept of value, for enterprise assets, is essential because it is a measure of their usefulness. Numerous concepts of values have been defined for enterprise assets. They can be categorized according to two main criteria. The first criterion is simply: “Who is concerned?” The second is whether the value is financial or non-financial.
The assets, in turn, are usually divided into physical assets and intangible assets. The former are the usual assets, those which can be seen and physically measured, such as buildings or machines. The latter, on the other hand, cannot be seen or measured directly but are nonetheless usually recognized as contributing to either the competitive advantage of a company or to its legal rights. In this category, we find assets such as trade secrets, copyrights, patents, human capital, and, of course, software. Some organizations1 even propose ways to account for intangible assets in financial statements and the literature on this subject is extensive.
Thus, we must ask what kind of asset an information system (IS) really is. An IS is actually a hybrid object. The hardware and the premises that house it are clearly physical assets. Remember also that an IS can be seen as the explicit knowledge of a company. Thus, an IS is also an intangible asset, just like human capital, specialized know-how, or patents. Some IT management methods are based on the idea that the IS is essentially an intangible asset whose financial value should be evaluated (see, for instance, [GIB 10]).
We must also ask which values are legitimate to describe the usefulness of an IS. It will come as no surprise that no single concept of value will do. We proceed in two steps. First, we review who are the main stakeholders of an IS and then propose a restricted set of values, both financial and non-financial. Second, we shall argue that the three non-financial values we retain, namely the use value, the sustainability value, and the strategic value2 [BON 11] are independent from each other and describe an IS's usefulness for most stakeholders.
To put things into perspective, recall that our aim is to relate value to simplicity. Value is about defining appropriate quantities that measure the utility of an IS from the point of view of various stakeholders. In a way, it is a black-box view of an IS, whose aim is not to identify the sources of value. Complexity and simplicity, on the other hand, are identified as important parameters that underpin values. They are the explanation of why value is created or destroyed. It is a white-box view of the IS. The task of Chapter 4, once we have settled on an appropriate set of concepts of value, will be to connect this black-box view with the white-box view of simplicity.
3.1. Who is concerned?
Different kinds of people will be interested in different aspects of the usefulness of the IS. We distinguish below two categories of IS stakeholders: the internal stakeholders, those who belong to the company, and the external stakeholders, those who exist outside the company.
3.1.1. Internal stakeholders
There are four categories in this group. Each asks a different question regarding the IS.
– The Chief Executive Officer (CEO) asks: “Is the IS adapted to our enterprise strategy”. The main interest of a CEO is to make sure that the IS is aligned with the enterprise strategy and that it will help differentiate the firm with respect to competitors, by promoting innovation for instance. The top management is also concerned with the contribution of the IS to the corporate balance sheet.
– The Chief Financial Officer (CFO) asks: “Are we making good use of our assets?” and “What is the contribution of IT to the balance sheet?” The primary interest of a CFO is cost control and an optimal allocation of resources: financial values are his main concern.
– The business management asks: “Do IT services meet our expectations?” This is mainly the point of view of endusers. Usability and productivity of business applications are their priorities. They also expect quick answers and fixes from the IT department in the case of problems or when requirements change.
– The Chief Information Officer (CIO) asks: “Is the IS sustainable and scalable?” The primary responsibility of a CIO is to provide IT services that will match user's needs now and in the future.
3.1.2. External stakeholders
In this category, we group users who are directly or indirectly concerned by the IS and who do not belong to the company. Some are only casual stakeholders (e.g. buyers, M&A (mergers and acquisitions) specialist) and some others only exist within regulated sectors (e.g. the Banking Commission for financial institutions). We distinguish four categories of users.
Investors include all stakeholders who are involved in asset management such as venture capital or private equity. These actors are primarily interested in evaluating the risks that IT puts on their investment.
Buyers are casual stakeholders whose main concern is to evaluate the impact of IT during a merger or an acquisition process. The criteria include the sustainability of the IS and the amount of work that will be required to integrate the IS of the acquired company with the existing IS.
Customers and providers are regular users who connect to the IS of the company. Their evaluation of the IS's usefulness is based mostly on quality of service, reliability, robustness, and the flexibility to meet new requirements.
Regulation authorities are public authorities in charge of enforcing regulations that are specific to some industries or that are related to the status of the company.
3.2. Concepts of value for an IS
As explained, no single concept of value will do. Therefore, the best strategy seems to define a small set of values, which, taken together, concern all stakeholders mentioned above. The first two concepts are important financial values, which are traditionally used in business accounting and when presenting a company's balance sheet. We give brief descriptions only for the sake of completeness, but will not use them later. The latter three are non-financial values and these will be our primary focus in Chapter 4 where we relate them to complexity. In section 3.3 we argue that these non-financial concepts are essentially independent, which guarantees that the information they globally convey is maximal.
The table below summarizes which stakeholder is concerned by which value.
3.2.1. Book value
This is a financial value and is therefore expressed in monetary units. In a sense, it is the simplest concept of value because it is based solely on evaluating explicit cost structures in the IS.
Book value is defined as the total capital expenditure (CAPEX) plus the total operating expenditure (OPEX).
This is the concept used in projects when it comes to making trade-offs between different options. The book value is particularly attractive as it leaves no room for appreciation or subjectivity. It is also especially easy to calculate when compared with other more elaborate or more subjective concepts of value. However, it does not really represent the usefulness of investments as only directs costs and financial gains are valorized.
The book value has become popular primarily through the use of two indicators:
– The Total Cost of Ownership (TCO), which includes both the investment costs and the operating costs.
– The Return on Investment (ROI), which measures the time necessary for a project to amortize the initial investment.
The book value is certainly an important parameter to consider for CFOs but it cannot be used alone to arbitrate between various projects. The cost structure attached to an IS is indeed extremely complex and includes both tangible and intangible assets such as human capital, organization, knowledge, and software.
3.2.2. Net worth
This is the second most important financial value to consider. In general, and not only with respect to IT, there are three different meanings that are usually associated with this concept, depending on who is using it.
1) The market value corresponds to the price that can be obtained by selling a property. For an IS considered as a whole, this value does not make much sense, though, as there is no real IS market. It does make sense, however, for separate business applications.
2) The liquidation value is the price that can be obtained when some property has to be sold immediately. Obviously, this value will usually be much lower than the market value. For an IS, this liquidation value will correspond to material assets such as workstations, servers, and networking equipment. This meaning is the one which makes most sense for an IS.
3) The replacement value represents the total costs incurred for maintaining the business activity in a situation where the IS, or part of it, had to remain down for a longer period. Evaluation of this value is conceptually quite straightforward. Indeed, all that is needed is to evaluate the cost of replacement procedures. This line of thought has been followed at great lengths by various authors to propose a new and original way to manage ISs (see e.g. [GIB 10]).
We can summarize the above by stating that the net worth, whichever definition we choose, contributes to the statement of the financial position of a company.
Now, we come to three non-financial values that will be of more direct relevance to our purpose. These are the concepts that we shall connect with the ideas of complexity and simplicity that we developed earlier.
3.2.3. Use value
The term use value goes as far back as the writings of Karl Marx, Adam Smith, and even Aristotle's philosophy, on Politics. The concept thus has a very long history. In rough terms, use value measures the utility of consuming a “good”. Adam Smith also opposes use value to the exchange value, arguing that a good, like a diamond for instance, can have exchange value but not use value. Water or air would be an example of opposite case (assuming there is a limitless supply thereof, which of course is questionable). Much has been written about the supposed objectivity or subjectivity of use value. Marx considered it an objectively determined value.
We will not review the whole history of this concept here. Our approach is to define a pragmatic concept of use value that is specific to an IS. The different stakeholders that we mentioned earlier may each have a different interpretation about what the utility of the IS should be. To establish an unambiguous definition of use value, we explicitly specify that the relevant stakeholders are the business users and the business management:
Use value is a measure of the utility of the IS for business users and external business partners.
Most of the time, the use value of applications is considered, rather than the use value of the IS as a whole. The criteria we propose to take into account are described in the following sections.
3.2.3.1. Functional criterion
The adequacy of the applications comprising the IS with respect to business processes is the single most important functional criterion that affects use value. Imagine that a business process requires processing tasks in some specific order. Adequacy will imply that software should allow entering and processing data in order, which is natural to users. The adequacy, however, remains distinct from other, ergonomics, which we examine below.
3.2.3.2. Non-functional criteria
Ergonomics defines how well graphical user interfaces are adapted to the business processes. The general idea is that good ergonomics favors good working conditions. Ergonomics is about how elements are arranged on the screen and also about mechanisms for entering data (keyboard, trackpad, mobile devices, etc.). Poor ergonomics could also imply repeatedly entering similar data or entering useless data.
Performance is primarily about the response time of applications and about scalability when the number of users and volume of data increase. Poor performance has negative impact on working conditions and thus indirectly penalizes business.
Availability is the ratio of uptime for an application or a system. Clearly, downtime will have direct financial impact when critical business applications are involved.
Reliability is the ability of an application or a system to work properly without losing or corrupting data. Such problems could have severe consequences (losing money, negative publicity, and failure to comply with regulations).
Many of these criteria that contribute to use value have a more or less direct relationship with one or more of the simplicity concepts we described in Chapter 2:
– Simplicity by hiding plays an essential role in ergonomics, whose purpose is precisely to make interaction with complicated data feel simple.
– Simplicity through time saving plays an obvious role in ergonomics (the user interface should be responsive), in performance and in availability (the average recovery time should be short).
– Simplicity through trust, obviously, has something to do with robustness and reliability of systems that can be trusted to work without interruption.
Some authors have proposed to quantify use value financially, by evaluating the cost of manually performing part or all of the data processing that is performed by the IS. Although this approach is quite interesting, there remains a large part of arbitrariness in this option because it implies a significant quantity of subjective assessments that are gathered mainly from interviews of the different domain experts.
3.2.4. Strategic value
The strategic value measures the contribution of the IS to the competitiveness of the company. IT is a non-financial value. In other words:
Strategic value measures how much the IS contributes to making the company different from others in the same market.
The strategic value is rather hard to measure in an unambiguous way. One possibility consists of classifying applications in an IS into three distinct categories:
Commodity applications such as mail, calendars, collaboration, and office tools. These are ubiquitous applications that are common to most companies today. They do not substantially contribute to making any difference with respect to competitors in the core business, as they are available for a moderate cost to all companies. Increasingly, they are simply SaaS applications offered by the major “cloud” players (Google, Amazon, Salesforce, etc.).
Commercial software packages or business applications are specific to some activity or business domain. They are not specific to a company, however, as is software that is developed in-house. One common mistake is to try and create significant competitive advantage by mere parameterization of commercial packages.
Business applications developed in-house are specific to a company. They are likely to provide most of the competitive advantages conferred by the IS.
There is no easy or obvious way to measure the strategic value. One possibility is to estimate the ratio of business applications, which are truly differentiating with respect to other companies. Another is to estimate the ratio of IT projects that correspond to significant business innovations.
The strategic value is not easily related to our primitive concepts of simplicity, at least directly. However, we will take that question on in Chapter 4 and show how the strategic value can be enhanced when fighting IT complexity.
The stakeholders who are most naturally interested in the strategic value are the CEO and the CIO as a partner of business users.
3.2.5. Sustainability value
Maintaining high levels for the use value and the strategic value should be considered the primary aim of any IT department. It is important to realize, however, that an IS with a good use value or good strategic value in the present does not imply that these levels will be maintained in the future. A poorly maintained IS could provide satisfaction to its users at a given time but performance could degrade quickly due to poor scalability or low maintainability.
Like a living creature, an IS is in permanent evolution. A balance is necessary between its robustness and flexibility. The ability to maintain high levels of use value and strategic value through flexibility is what we call the sustainability value. It is a non-financial value. The sustainability value, or sustainability in short, is a hybrid that takes into account many aspects of IT quality:
How well is flexibility designed into the IS? Flexibility is supported by a high level of modularity at all levels of the IT architecture: the infrastructure, the quantity of reusable services, and the quantity of reusable software components. A high level of modularity enables us to evolve an IS by composing existing modules. It is loosely related with simplicity through organization, which among other things implies minimizing redundancies.
Scalability is the ability of an IS to accommodate an increasing number of users by merely adding hardware resources. It is a specific form of flexibility with respect to increasing work load. It is directly related to simplicity through hiding, as scalability implies, by definition, hiding altogether the complexities related to pooling hardware resources.
The quality of the IT governance is important to guarantee that there exists a complete chain of responsibility that covers all aspects of IS evolution: the physical infrastructure, the logical architecture, and the software architecture. Loosely speaking, there is probably some relation with simplicity through organization again here.
Quality of modeling and modeling processes is essential for maintaining a consistent overview of what the IS contains. Having a clear map of the logical architectures, the flows of data, the services available, and the software architecture of each component is a prerequisite to any change of the IS, because it allows us to maintain increasing complexity under control. Consistent and systematic modeling guarantees that the memory of the IS architecture will never be lost, independently of who is in charge of the IT in the future. When no modeling is available and those who built the system are no longer available either, some archeology or reverse engineering work will be necessary before changes or extensions can be implemented. Modeling allows the creation of a mental picture of the IS, or part of it. It is thus directly related to simplicity through learning and the time saving it implies.
With regard to flexibility, our first point, one approach to its evaluation consists of comparing the current situation of an IS with a well-defined set of good practices, such as CMMI, ITIL, COBIT, or TOGAF. There are even tools, such as the IS-Rating tool, whose purpose is to evaluate the technical quality of the three basic middleware components of an IS:
– The MDM3, for the coherence and maintainability of reference data.
– The BRMS4, for the flexibility and traceability of changes to business rules. Business rules are understood here as a set of rules that are enforced to ensure consistent data integrity over time.
– The BPM5, for the flexibility and traceability of changes of business processes
The assumption of the IS-Rating tool is that sustainability largely relies on the quality of these three middleware components.
Summarizing:
The aim of sustainability is to provide an evaluation of the robustness and the flexibility of an IS and its organization to guarantee its usefulness in the future.
The primary stakeholders who are directly concerned with the sustainability value are the CIO and any potential buyer: the CIO because he is in charge of insuring the robustness and the adaptability of the IS and buyers because they need to evaluate the integration costs of the IS into their IS.
In contrast with use value and strategic value, sustainability value is not an aim in and of itself but a means to ensure the sustainability of IT investments. It is a predictor for the evolution of the other two values in the near future.
3.3. Are these values sufficient and independent?
Use value mainly concerns business users and partners, while strategic value primarily concerns CEOs and CIOs. They are thus both needed, as they concern separate kinds of stakeholders. As soon as we acknowledge the need to evaluate the ability of the IS to cope with future changing requirements, and not just with present needs, we must add something like sustainability value. Not much doubt is permitted that this trio of values is indeed needed to evaluate the utility of the IS now and in the near future.
Figure 3.1. Use value, sustainability value, and strategic value will be related to simplicity actions in Chapter 4
The question which remains is: “Are these three concepts truly independent of each other?” We claim they are. The following table lists all possible combinations of these values, which are given nicknames:
These are only meant to identify extreme scenarios and thus illustrate that situations indeed exist where the three values are independent.
3.3.1. IT chaos
This is a state of unpredictability and non-sense. The best solution is likely to start building a new system from scratch rather than trying to fix or modify the existing system. Decisions will be made based mostly on financial considerations.
3.3.2. Tech academy
This scenario has become rather uncommon lately but it still exists in some places. In this situation, the architectural foundations are sound because the IT department is run by competent technical experts. However, focus is on technology alone, while forgetting that an IS is first and foremost a tool, not a technical playground, and that its primary purpose is to serve users, customers, and the business. Such a situation usually results from bad governance that has put too much power in the hands of tech teams.
The remedy is to completely reorganize the IS governance to give more power to the business.
3.3.3. Alignment trap
This situation occurs when a company has overemphasized the importance of the strategic value. Management thinks the primary goal of an IS is to be aligned with the enterprise strategy, with no consideration for the robustness and user satisfaction. This short-term vision prevents the definition of any robust architecture. All manpower is used to cope with the need for flexibility and handling ever-changing requirements. In recent years, many IT departments opted for service-oriented architecture (SOA) because they were obsessed by flexibility and alignment of IT with business processes. Huge amounts of money were invested into IT that never had time to become mature.
The alignment trap scenario was described in detail in a famous article from the Sloan Management Review from MIT [SHP 07].
The remedy is for the CIO to become aware of the specifics of IT. A global overhaul of IT governance is needed as well as substantial investment to consolidate the basic IS infrastructure.
3.3.4. Users are unimportant
This scenario is rather uncommon. It corresponds to a situation in which the IS is based on solid foundations and is also aligned with the company's strategy but the ergonomics of application is neglected and obsolete.
The remedy is to reorganize IT governance to include user representatives in the decision process.
3.3.5. Business-user tyranny
This situation is one where business users lay down the law. Current use value is high but there is no long-term thought for creating a robust and modular architecture that can accommodate future requirements. There is no strategy in the long run for developing specific applications with strategic added value. IT management is purely reactive.
The remedy is for the CIO to become aware of the specifics of IT. A global overhaul of IT governance is needed as well as substantial investment to consolidate the basic IS infrastructure.
3.3.6. Wrong direction
This is a rather common scenario in which the IS brings satisfaction to its users and has solid foundations. However, there is no real strategy to turn the IS into a key competitive advantage.
The remedy is for the CEO or another guardian of the organization's strategy to become more involved in IT governance.
3.3.7. Architecture is a waste of money
This is probably one of the most common scenarios. Although the IS is currently bringing satisfaction to business users and is bringing some competitive advantage with regard to other players in the same market, there is no guarantee that this situation will be maintained in the future. The IS has no robust foundations and no built-in flexibility. Future changes are likely to be either expensive or impossible without creating a new system from scratch.
The remedy is for the CIO to become aware of the specifics of IT. A global overhaul of IT governance is needed as well as substantial investment to consolidate the basic IS infrastructure.
3.3.8. IS heaven
This is definitely an uncommon situation. However, even those “happy few” will have to work to stay in this ideal situation.
Chapter 4 addresses the relationships between simplicity, complexity concepts, and our three independent measures of value: use value, strategic value, and sustainability value.
1 International Accounting Standards Board (IASB).
2 Some authors use different terms for these two definitions. We refer to Pierre Bonnet's book [BON 11]. What is called “sustainability value” here is called “intrinsic value” there and what is called “strategic value” here is called “business value” there.
3 MDM = Master Data Management.
4 BRMS = Business Rule Management System.
5 BPM = Business Process Management.