When organizations consider the case for large application modernization initiatives, presenting both pros and cons of the exercise in money can help attract the attention of decision makers. When anticipated monetized benefits can be shown to outstrip anticipated monetized costs, a picture is free to form in management’s heads while management’s heads remain free from the technical details such an exercise involves.
This simplification of pros and cons may help interdepartmental communication, but just how many babies are we throwing out with this bathwater?
About fifteen years ago a friend of mine started a parcel delivery service in a European capital. There was obviously a demand for such services and his company has been quite successful. After fifteen years of business it was about time to replace his first van so he went to a car dealer. At first glance he was astonished about the marvels of contemporary car technology. The car salesman spoke highly about hybrid technology and cost reduction.
In an attempt to get a better deal for his old van he challenged the salesman “quite interesting, but do I have a business case?” The car salesman who did not have a degree in business administration replied “if you didn’t have a business case you would have been out of business for a long time.”
A C-level decision about a major investment requires a sound calculation of cost, revenues and timeframe. All projects require resources in the form of money, human resources or other contributing factors. The problem is making a comparison between projects of different sizes and project lead time. The general solution is quantification: first express everything in terms of money and then apply some calculations on the gathered figures. The results of these calculations enable us not just to determine if the investment is worthwhile, but to prioritize those projects that have the most merit.
Return on investment (ROI) is the most commonly used method to compare differently shaped projects. A refinement on the method can be applied to eliminate differences in cash flow by using the net positive value of money. Furthermore the internal rate of return (IRR) can be compared to an opportunity to obtain an external rate of return (ERR).
Another dimension used in decision making is the payout period. A payout period of one year would mean that financial resources are already covered and only the budgets for other resources have to be taken into account.
Yet there is something more to it which is not covered at all by these financial ratios and formulas.
Let us look at method used by Einstein: the gedankenexperiment. Einstein’s gedankenexperiments enabled him to travel in the front seat of a photon and wonder about the road ahead without the need for a large and expensive laboratory.
Twenty-five years ago, a company took a golden opportunity to acquire a business building. It was situated at a marvelous location near the exit of a highway. There were plenty of parking lots available. The building had roomy offices and sufficient space for future growth. However the picture gradually changed over time.
After 25 years, the building was free of mortgages and the occupancy costs were very low. But meanwhile, with about 6% annual growth during that period, the number of employees had quadrupled. As a result, office space was cramped and there were insufficient parking places. Prevailing “greener” laws on commuter traffic required places of employment to be reachable by means of public transportation, which was not possible at that site. Because of burglary incidents in the neighborhood, some severe security precautions had been taken. The building was guarded by video cameras and surrounded by barbed wire which gave the building the charm of a high-risk penitentiary.
The building is still crowded by young ambitious managers, fighting for budgets to conduct profitable projects. It is time to move, but do we have a business case to leave a low-cost building with nearly no market value?
The beauty of a “Gedankenexperiment” is that we can make simulations which are very hard to conduct in real life. Let us set the building on fire and see how it affects decision making.
In contrast to the gradual deterioration that took place over a 25-year timespan and did not lead to a relocation of business activity, the sudden increase of heat makes everybody leave the building. There is an immediate consensus not only that leaving is an imperative, but additionally that returning to the location is impossible. This behavior reminds us of …
The gradual build-up of risks and costs associated with technical obsolescence of business applications can persist for decades without requiring or receiving the attention of daily management. However at some point in time a gradually deteriorating situation will require communication with the other frogs in the pot to make them aware of the increasing risks.
The pitfall is the overreliance on calculation techniques for comparing short term opportunities to long term strategic decision making. The ROI metric will consistently fail to alert us to warming pot situations that can be resolved through application modernization.
Maybe the car salesman correctly hit on the strategic aspect after all.