ON THE TECHNICAL DESCRIPTION OF VALUE MEASURING METHODOLOGY

International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 2, June 2015 DOI: 10.5121/ijmvsc.2015.6201 1 O N THE T ECHNICAL D ESCRIPTION OF V ALUE M EASURING M ETHODOLOGY Tolga MATARACIOGLU TUBITAK BILGEM Cyber Security Institute, Turkey A BSTRACT Value Measuring Methodology (VMM) is a proven toolkit of existing techniques used to define, capture and measure both quantitative and qualitative value associated with information technology (IT) investments. It is based on public and private sector business and economic analysis theories and best practices. The VMM was first articulated in a report by Booz Allen Hamilton in 2002 for the US Social Security Administration, as part of an electronic services project. The purpose of Value Measuring Methodology is to define, capture and measure value associated with electronic services unaccounted for traditional return on investment (ROI) calculations, to fully account for costs and to identify and consider risk. K EYWORDS Value Measuring Methodology, VMM, Return on Investment, Cost Element Structure ABBREVIATIONS VMM Value Measuring Methodology ROI Return on Investment CES Cost Element Structure 1. I NTRODUCTION The Value Measuring Methodology is composed of four steps: Develop a Decision Framework; Define Alternatives; Analyze Alternatives; Document and Communicate. Each step is necessary to ensure both qualitative and quantitative information is captured. Additionally, each step must be completed sequentially to ensure complete documentation and objectivity. The figure representing those steps is given below (figure-1). The input of the methodology is the requirements. The output of the first step is decision framework. The output of the second step is alternatives with estimate documenting value, cost, and risk, economic factors and assumptions. Comparison of cost, value and risk is the output of the third step. Finally, documentation, insight and support for improving decision making and performance measurement through Lessons Learned are the outputs of VMM. International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 2, June 2015 2 Figure1. Basic Steps of VMM 2. B ASIC S TEPS OF VMM Step 1: Develop A Decision Framework The output of this step is decision framework and this output is used by the second step. The cornerstone of VMM is the decision framework. Comprised of three structures: value, cost and International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 2, June 2015 3 risk. The framework provides decision makers with a blueprint for defining, analyzing and comparing alternatives. This step is composed of four tasks: • Task 1: Identify and define value structure • Task 2: Identify and define risk structure • Task 3: Identify and define cost structure • Task 4: Begin documentation These tasks are shown at figure-2. The roles: Board/executive, Business Management Figure 2 Tasks of Step 1 Task 1: Identify and Define Value Structure The Value Structure is comprised of five Value Factors: direct user value, social value, government financial value, strategic political value and government operational foundational. International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 2, June 2015 4 The Value Structure describes and prioritizes benefits in two layers. The first layer is comprised of the Five Value Factors (Direct User Value, Social Value, Government Financial Value, Government Operational and Foundational Value, and Strategic/Political Value) that must be addressed when considering the ability of an initiative to deliver value to the government, direct users, and society at large. The second layer contains the measures that define those values in quantitative terms. Figure 3 Value Structure The outputs of this task are “Prioritized value factors” and “Defined and prioritized measures within each value factor”. As seen in Figure 3, the first column is Value Factors, and the second is Value Measures. The roles: Board/executive, Business Management Task 2: Identify and Define Risk Structure The outputs of this task are “Risk Factors, “Initial risk factor inventory” and “Risk tolerance boundary”. Figure 4 Risk Structure The roles: Board/executive, Business Management International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 2, June 2015 5 Task 3: Identify and Define Cost Structure The outputs of this task are “Tailored cost structure” and cost element structure. The Cost Element Structure (CES) captures the individual elements of cost associated with delivering value and mitigating risk. The roles: Board/executive, Business Management Task 4: Begin Documentation The output of this task is “Initial documentation of basis of estimate of cost, value and risk”. Forcing the development of the decision framework, with the assignment of scores to intangibles allowing comparison to other intangibles as well as tangibles, eases the resolution of differences of perspectives between senior managers (e.g. Chief Financial Officer, Risk Manager, and the proposer of the initiative), allows changes to the scores to flow through to the rest of the process (especially the analysis of alternatives), and provides clarity of benefits to a board (before, during, and after the initiative), and clarity of priorities to people looking after more detailed aspects of the initiative. The same transparency of values apply if the proposal is developed at an enterprise level, or within a lesser organizational unit. Major value factors (from which the value hierarchy is developed) include the following: • Direct Customer Value: Benefits to customers/clients, e.g. convenient access, product enhancement. • Social: Benefits to society as a whole, e.g. reducing CO2 emissions. • Operational: Better operations and lowering barriers to future initiatives, e.g. improved infrastructure. • Strategic: Contributions to strategic initiatives and fulfilling the mission of the organization • Financial: Financial benefits, including increased revenue, decreased costs, and cost avoidance. The roles: Board/executive, Business Management Step 2: Define Alternatives The output of this step is alternatives with estimate documenting value, cost, and risk, economic factors and assumptions This step is composed of four tasks: • Task 1: Identify and define value alternatives • Task 2: Estimate value and cost • Task 3: Conduct risk analysis • Task 4: Ongoing documentation The figure representing those tasks is given below. The roles: Business Management, IT Management, Audit/Compliance International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 2, June 2015 6 Figure 5 Tasks of Step 2 Task 1: Identify and Define Alternatives The output of this task is “Viable alternatives for solutions”. The starting point for developing alternatives should be the information in the Value and Risk Structures and preliminary value drivers identified in the initial basis of estimate. The roles: Business Management, IT Management, Audit/Compliance Task 2: Estimate Value and Cost The output of this task is “Cost and value analyses”. The techniques given below are used for cost estimation: International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 2, June 2015 7 Table 2 Cost Estimation Techniques The roles: Business Management, IT Management, Audit/Compliance Task 3: Conduct Risk Analysis The output of this task is “Risk analyses”. The figure for this task is given below: Figure 6 Risk Analysis The roles: Business Management, IT Management, Audit/Compliance Task 4: Ongoing Documentation The output of this task is “Tailored basis of estimate documenting value, cost, and risk, economic factors and assumptions”. The roles: Business Management, IT Management, Audit/Compliance Step 3: Analyze Alternatives This step of VMM framework has five tasks: • Task 1: Aggregate the cost estimate International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 2, June 2015 8 • Task 2: Calculate the return on investment • Task 3: Calculate the value score • Task 4: Calculate the risk score • Task 5: Compare value, cost, and risk The output of this step is comparison of cost, value and risk. The figure representing those tasks is given below. The roles: Business Management, IT Management, Audit/Compliance Figure 7 Tasks of Step 3 Task 1: Aggregate the Cost Estimate The output of this task is “Cost estimate”. International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 2, June 2015 9 The roles: Business Management, IT Management, Audit/Compliance Task 2: Calculate the Return on Investment The output of this task is “ROI metrics”. The roles: Business Management, IT Management, Audit/Compliance Task 3: Calculate the Value Score The output of this task is “Value score”. The roles: Business Management, IT Management, Audit/Compliance Task 4: Calculate the Risk Score The output of this task is “Risk scores (cost and value)”. The roles: Business Management, IT Management, Audit/Compliance Task 5: Compare Value, Cost and Risk The output of this task is “Comparison of cost, value and risk”. The roles: Business Management, IT Management, Audit/Compliance Step 4: Document and Communicate This step primarily focuses on effective communication. This step of VMM framework has four tasks: • Task 1: Communicate value to customers and stakeholders • Task 2: Prepare budget justification document • Task 3: Satisfy ad-hoc reporting requirement • Task 4: Use lessons learned to improve processes The output of this step is documentation, insight and support for improving decision making and performance measurement through Lessons Learned The figure representing those tasks is given below. The roles: Board/Executive, Business Management, IT Management, Audit/Compliance