BITS Pilani

Pilani Campus

Defining the value of

business analytics

BITS Pilani Nirankush Dutta

Pilani Campus
 BITS Pilani
Pilani Campus

Importance of defining value

Why you need to define value
• Value: Worth of various goods and services as identified in the
market
• Created when action is taken, not when insight is generated
• BA can be applied to multiple discrete value-creating activities
within an organization
• Importance of value addition- a constant
– Common starting point to compare, contrast and consider
– Cannot provide guidance around what form specific measures
should take
• Defining value is critical, else
– Reluctance of organization to invest in change
– Reluctance of teams to change their processes

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Why you need to define value
• Gap between planning and execution
• Reasons for failure
– Trying to accomplish too much
• Broad set of competencies or extended focus may act against
– Not prioritizing
– Getting blocked by other stakeholders
• Struggle to get internal support
• Understand the benefits and the costs
– Building internal support
– Eliminate bias and minimize counterarguments
– Increase focus and probability of success
• Translate relative complexity of BA into outcome-based
language
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Different types of value
• The outcomes obtained are the source of business analytics
not the analysis itself
• Without action there is no value
• Value of change
• Value means different things to different people
• Dimensions of benefits of Business Analytics Project
– Tangible versus intangible
– Organizational vs personal

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Personal vs. Organizational Value
• Classic view of measuring value
• Decisions often made
– With high level of internal and external uncertainty
– Within limited time frame
– Based on impact on a personal level
• Organizations will not invest unless there is a return
• People will not commit unless they benefit somehow

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Value Matrix

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Role of business case
• Why build a business case ?
– A Necessity for financial release
• Financial constraints
• Opportunity cost
– A Way of Minimizing Bias
• Bias arising from interest and psychology
– A Way of Creating Focus
• Avoid scope creep
• An effective business case communicates
– Identifies the expected return
– Quantifies investment needed
– Describes timings and limits of return

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Necessity for financial release
• Absolute return
• Level of investment
• Timing of investment and return
– Money needs to be allocated within budgeting processes
– Other options may offer return sooner

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Minimizing Bias
• Reality is defined by perceptions
• Psychological bias:
– Subjective biases
– Historical anchoring
– Preference toward specifics over trends
• Base rate bias
• Business case can help
– provides quantitative (and not subjective) measures
– uses a standardized and transparent process
– requires explicit documentation of the assumptions

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Creating Focus
• Unwieldly projects
– Increases risk and the odds of failure
– Lengthens the time until value is realized
– Broadens the focus of organizational transformation

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Identifying tangible value
• Tangible benefits : Returns that can be readily translated to
some sort of economic return
– Profitability improvement
– Capital investment reduction
– Improved liquidity
– Decreased bad and doubtful debts
– Deferred investment
• Sources of Tangible value
• Revenue and profitability improvements
• Productivity improvements
• Cost deferrals
• Risk mitigation

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Common Financial Measures
• Money
• Time
• Rate of return
– Total cost of ownership
– Return on investment
– Payback
– Net present value
– Internal rate of return

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Total cost of ownership
• Advantage
– Ensures all costs are captured
– simple to calculate and communicate
• Disadvantage
– Discouraging investment in high - cost/high - return projects
– Biasing investment toward low - cost projects
– Encouraging a culture of cost - cutting over profit seeking

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Return on Investment
• A simple calculation to represent the simple return from an
investment
• A class of measures that provide different perspectives on
investment return
• Total return from the investment less the total cost of the
investment
• Advantage:
– captures both returns and cost in a single measure
– simple to calculate and communicate
• Disadvantage:
– Treats investments that have a long payoff time the same as
investments that pay off immediately

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Payback Period
• Advantage:
– provides insight into the ability of the investment to cover its
costs
– simple to calculate and understand
• Disadvantage:
– Not considering any acceleration in the rate of return in the post
- payback period
– Not taking into account the greater value of money delivered
sooner
– Failing to represent potentially large returns in the post –
payback period

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Net Present Value
• Time value of money
• Key elements
– Define the life of the investment
– Understand the cost and return schedule over the life of the
investment
– Identify the discount rate to be used
• Advantage:
– Provides a directly comparable measure between projects
– Accounts for the time value of money
• Disadvantage:
– Requiring a certain level of financial acumen
– inability to deal with strategic and long - lifespan investments

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Internal Rate of Return
• Equal to the interest rate needed to make the net present
value of future cash flows equal to zero.
• Represented as a percentage
• Given limited availability of capital, it might be more
advantageous for an organization to select a project with a
lower IRR if it delivers greater NPV in a reasonable time frame.

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Sources of Tangible Value
• Revenue and profitability improvements
• Productivity improvements
• Cost deferrals
• Risk mitigation

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Identifying Intangible Value
• Intangible returns include
– Personal time savings and improved productivity
– Strategically valuable insight
– Reductions in uncertainty
– Faster and better decision making
– More trustworthy data
• Everyone cares but not enough
• Sources of Intangible benefits
• Strategic value
• Time savings
• Insight and ease of decision making
• Career growth

BITS Pilani, Pilani Campus

BITS Pilani, Pilani Campus