New Ideas on the ROI of Data and Business Rules, Part 1

This Special Feature is being run in cooperation with the 11th Annual International Business Rules Forum that will be held in Orlando, Florida from October 26 to 30,
2008.  For more information, please click through the Business Rules Forum banner on the left side of the TDAN.com site.  Also, This Special Feature is an introduction to Ron Ross’s new
Feature Column on TDAN.com.  Check back in August for the next installment of Ron’s new column.

Cost-justifying IT initiatives relating to data quality or business rules has always been problematic. Management is right to want analysis of the ROI in advance, especially in companies without
prior experience. Now there is a new way to think about the ROI of data quality and business rules. Ironically, it comes from not looking at the data or at the rules at all.

In their new book, Smart (Enough) Systems1, Neil Raden and James Taylor argue convincingly that it’s some decision that data and rules can be used to make that provides
the actual value-add for the business – not the data or rules per se. The authors look at data and rules simply as the means to some important business end, some operational decision(s) to be
made. So the Enterprise Data Management (EDM) message is that you shouldn’t talk to business executives about the means (data and rules) when it’s the ends (decisions) that really
matter. They’re simply the wrong artifacts. Extrapolating, it’s the ROI from the decision that should be examined if you want to do cost-benefit analysis, not from the data or rules per
se.

Cost-benefit analysis under EDM is therefore based on the question, “What is the economic value to your company of its front-line operational decisions?” These front-line decisions are
everywhere – so numerous, in fact, they are easy to miss. Here are some examples:

• How do we price our product for this transaction?
• What credit do we give to this customer at this point in time?
• What resource do we assign to this task right now?
• Do we suspect fraud on this particular transaction?
• What product configuration do we recommend for this request?
• Can we confirm this reservation?
• What’s the best cross-sell or up-sell offering for this sale?
• Do we anticipate any delay on this shipment?

To examine ROI, consider the following simple example: You send promotional letters to 10,000 prospects. Decision?

Of course, but as Raden and Taylor point out, not just one decision, but 10,000 decisions – sending the letter to each individual prospect is in itself a decision. Although the value to
the company of each individual decision may be relatively low, here’s the kicker – they add up big-time! Consider that you might also make the 10,000-prospect decision not
once, but many times during a year. Moreover, you might also make it through multiple channels. The value of a particular kind of front-line decision is therefore generally as follows:

Value of a kind of front-line decision =
Value of each individual decision x Total number of decisions made

How do you measure the potential value of improving a front-line decision?2  In traditional thinking about cost-benefit, there are three broad approaches (in order from easiest to
hardest): Doing things cheaper, doing things faster, and doing things smarter. Potential evaluation criteria for each of these approaches under EDM are given in the table
below.

 Table of Evaluation Criteria for Analyzing the Potential Cost-Benefit from Improving a Decision

To fully analyze ROI, you must consider not only potential value, but also cost. How should costs be viewed under EDM?

Raden and Taylor make the crucial observation that a focus on EDM permits an organization to “decouple its expense growth from its revenue growth.” Here’s what I take them to
mean. In traditional IT development, almost every corporate initiative, large or small, requires a concomitant and more or less proportional investment in systems development. EDM liberates the
organization from this lock-step paradigm. By externalizing as much of the decision logic as possible to business people, and providing a persistent, generalized infrastructure for making changes
to that decision logic, investment is spread across an ever growing number of realized business opportunities. To say that differently, you move business people away from competing for IT resources
and toward managing data and rules.

In short, “decouple expense growth from revenue growth” simply means turning a liability into an asset. That’s exactly how Raden and Taylor describe operational decision making
under EDM, which is very good news for people who believe it is possible for organizations to act cheaper, faster and smarter. 

For more information on EDM and related ideas you can access free recent webinars in the EDM Summit webinar
archives by Ron Ross (November 13, 2007) and Neil Raden (December 13, 2007).

References:

1. Smart (Enough) Systems: How to Deliver Competitive Advantage by Automating Hidden Decisions, Neil Raden and James Taylor, Prentice-Hall, June 2007, ISBN: 0132347962. Raden and Taylor are
   Co-Chairs of the first annual Enterprise Decision Management Summit (October 26-30, Orlando), www.EDMSummit.com.
2. In an appendix, Raden and Taylor introduce a new approach to evaluate the ROI of decisions, not discussed here, called Decision Yield.