Tackling the ROI in MDM
In Master Data Management, Part I: Show Me the Money, Roddy Martin, AMR's VP Research for consumer and life sciences manufacturing, tackles the issue of cost justification for large-scale projects such as MDM and its sister discipline CDI. In the end, as Martin notes, the general feeling is that "it's too difficult to get the business to buy into it".
I have been thinking a lot about the ROI for CDI in recent weeks, primarily driven by my customers' efforts to forecast, model, and quantify the benefits. Two years ago when I started working on CDI, the technology was very early and the space was still being defined. Today, ROI analysis of the benefits is in a similar place. There simply aren't enough enterprise-wide CDI deployments that have been in production for a long enough period of time to gather hard data on the improvements and identify trends and patterns.
Every piece of evidence that we have is therefore, almost by definition, anecdotal. But that also means that every piece of evidence that we have is important, as we build toward a critical mass that allows us to make some justifiable generalizations, establish metrics and set expectations for the realizable benefits of CDI.
Martin's article touches on several of the problems inherent in creating an investment scenario for MDM. Although he doesn't call them out individually, there are four issues highlighted in this first article:
1. MDM is big. It's a big problem, affecting the whole enterprise, touching dozens or hundreds of applications. The solution is therefore likely to be correspondingly big, and correspondingly expensive. The path of least resistance is to ignore it, and hope that it somehow resolves itself or that someone else deals with it.
(On the other hand, I actually had one senior IT manager say to me, "I'm 52 years old. I know we're not going to resolve our master data issues on my watch - I'll be retiring in another 4-5 years. This problem will outlive me. But if we don't get started now, it's only going to get worse and our competition will get better." Proof - or at least, another anecdote - that if senior management can think strategically about these issues then the size of the problem can actually help facilitate action.)
2. MDM and CDI are complex technologies, not easily understood by the business leaders. Or many of the technology leaders, either. Business leaders, in particular, are accustomed to making financial decisions. Invest $1, save $2. Invest $1, earn $2. The wisdom in effective management of scarce resources is in evaluation of the tradeoffs. No company has the resources to undertake every potential initiative, so judgment is required to determine those projects that are most strategic, most likely to succeed, and contribute to a long term vision for the company.
Note that it is not that business leaders don't understand the problem. They see the results of bad customer data every day, reflected in operational costs and customer satisfaction issues. They know it's a problem.
The problem is that the solution is a very technical one. Business leaders are not afraid of spending to solve a problem, but most of the problems corporations have tackled have been addressable by an application. If you can't keep track of your customers, you install an application that tracks customers. Problem solved. CDI certainly requires an application, but it is much more than just an application. As Aaron Zornes of the CDI Institute notes:
3. Didn't we pay to fix this already? CRM and ERP have long promised "single view" types of benefits, through the simple aggregation of activity around a customer or an order on to one system. There have been significant integration expenses already incurred in plugging those systems into existing IT environments. There is a strong sense that we should already be there when it comes to a single view of the customer. Certainly the technology exists - has existed for quite awhile. Standards have emerged such as XML for data interchange, OAG for customer data, and BEPL for business rule modeling. Integration vendors have been telling the story for years, and many dollars have been spent in pursuit of pieces of the CDI puzzle.
Unfortunately, pieces of the puzzle is all they generally are. As Martin notes in his article,
I don't think that companies have to wait and see if CDI is a viable technology. Clearly it is, as dozens of companies are doing it successfully today.
I don't think that the ROI model needs to be quite as "tight" as a typical application-based project plan would require, and companies who are committed to improving their ability to serve their customers will come to terms with this. In every CDI implementation I have been involved in, there has been an ROI model, but they have each been different - sometimes dramatically different - in the economic drivers for initiating the project. This is as it should be. Every company has a unique combination of technical environment and pre-existing infrastructure, channels for communicating with customers and processing orders, cost structures and revenue opportunities. I doubt one model can encompass every retail banking environment, much less every financial institution - and certainly not every industry.
So the success of CDI as an initiative on the drawing board of CTOs worldwide is likely to succeed in the executive offices and boardrooms of major corporations not on the basis of pure, hard, ROI cost-benefit data. It is going to succeed - or fail - on the ability of key CDI project sponsors to convey the vision, secure the executive participation, and create the sense of urgency to drive the project off the drawing board and into production.
Certainly more hard data will help. Even anecdotal evidence is significant when the volume grows to a point where trends can be identified. There are already a handful of useful metrics that have emerged from the collective CDI experience so far, and the favorable evidence is mounting.
I have been thinking a lot about the ROI for CDI in recent weeks, primarily driven by my customers' efforts to forecast, model, and quantify the benefits. Two years ago when I started working on CDI, the technology was very early and the space was still being defined. Today, ROI analysis of the benefits is in a similar place. There simply aren't enough enterprise-wide CDI deployments that have been in production for a long enough period of time to gather hard data on the improvements and identify trends and patterns.
Every piece of evidence that we have is therefore, almost by definition, anecdotal. But that also means that every piece of evidence that we have is important, as we build toward a critical mass that allows us to make some justifiable generalizations, establish metrics and set expectations for the realizable benefits of CDI.
Martin's article touches on several of the problems inherent in creating an investment scenario for MDM. Although he doesn't call them out individually, there are four issues highlighted in this first article:
1. MDM is big. It's a big problem, affecting the whole enterprise, touching dozens or hundreds of applications. The solution is therefore likely to be correspondingly big, and correspondingly expensive. The path of least resistance is to ignore it, and hope that it somehow resolves itself or that someone else deals with it.
(On the other hand, I actually had one senior IT manager say to me, "I'm 52 years old. I know we're not going to resolve our master data issues on my watch - I'll be retiring in another 4-5 years. This problem will outlive me. But if we don't get started now, it's only going to get worse and our competition will get better." Proof - or at least, another anecdote - that if senior management can think strategically about these issues then the size of the problem can actually help facilitate action.)
2. MDM and CDI are complex technologies, not easily understood by the business leaders. Or many of the technology leaders, either. Business leaders, in particular, are accustomed to making financial decisions. Invest $1, save $2. Invest $1, earn $2. The wisdom in effective management of scarce resources is in evaluation of the tradeoffs. No company has the resources to undertake every potential initiative, so judgment is required to determine those projects that are most strategic, most likely to succeed, and contribute to a long term vision for the company.
Note that it is not that business leaders don't understand the problem. They see the results of bad customer data every day, reflected in operational costs and customer satisfaction issues. They know it's a problem.
The problem is that the solution is a very technical one. Business leaders are not afraid of spending to solve a problem, but most of the problems corporations have tackled have been addressable by an application. If you can't keep track of your customers, you install an application that tracks customers. Problem solved. CDI certainly requires an application, but it is much more than just an application. As Aaron Zornes of the CDI Institute notes:
During 2005, the average CDI software investment was $1.2 million with the typical large scale CDI project requiring systems integration (SI) fees ranging four to six times the amount spent on the CDI software.Clearly, then, application integration is a critical cost factor in implementing a CDI solution. Faced with a $7-8 million price tag, a business leader is going to want to drill down on why costs are so high. And the answer that comes back is going to be in terms of connectors, adaptors, middleware, BPM, metadata and data models. Again, it isn't that these concepts are beyond the understanding of a business leader, but they are very hard to tie to specific costs or benefits. They don't fit into established decisioning models for IT projects very well.
3. Didn't we pay to fix this already? CRM and ERP have long promised "single view" types of benefits, through the simple aggregation of activity around a customer or an order on to one system. There have been significant integration expenses already incurred in plugging those systems into existing IT environments. There is a strong sense that we should already be there when it comes to a single view of the customer. Certainly the technology exists - has existed for quite awhile. Standards have emerged such as XML for data interchange, OAG for customer data, and BEPL for business rule modeling. Integration vendors have been telling the story for years, and many dollars have been spent in pursuit of pieces of the CDI puzzle.
Unfortunately, pieces of the puzzle is all they generally are. As Martin notes in his article,
...business was so engrossed in gaining functional efficiency and lower costs in its independent silos (for example, manufacturing quality, finance, and sales) that it only saw the departmental and functional side of information value and did not think further: to the whole company. This problem is structurally reinforced by the fact that the business executive leadership team, structured to represent business functional silos, never saw the cross-functional problem until the operational strategy ... identified the need for one version of the truth.4. Established project evaluation methods are insufficient. After the tech crash of 2001, and exacerbated by 9/11, spending on technology was drastically reined in. A mentality emerged which served companies well at the time, forcing hard dollar cost justification for every expense, establishing expected returns and time horizons. This exercise needs to be performed for CDI projects as well, but it is made more difficult by several factors:
- There is a large aspect of "community good" about a CDI project. Every department and business unit benefits from having consistent and accurate customer data. But the project is generally so large that it is difficult to cost justify at the individual project or even business unit level. This means that a significant amount of internal alignment behind the project has to take place. This, in turn, requires strong senior management (typically CEO) sponsorship for the initiative.
- In a traditional purchase evaluation, the benefits to be derived can either be cost savings from new efficiencies, or revenue upside. If the benefit is revenue-based, a business leader has to "sign up for the revenue". In an enterprise-wide project like CDI, this methodology would require almost every business unit to sign up for some incremental revenue increase as a result of CDI success.
- The benefits from CDI are mostly "soft" benefits, such as improved customer satisfaction, greater share of wallet, perception of the company as "customer-centric" and better target marketing. Expense reduction alone is not usually sufficient to drive a CDI project. Certainly CDI benefits play a critical role in harder metrics like revenue per customer, average sale, and customer churn rates, but these linkages are not generally tight and are hard to quantify.
I don't think that companies have to wait and see if CDI is a viable technology. Clearly it is, as dozens of companies are doing it successfully today.
I don't think that the ROI model needs to be quite as "tight" as a typical application-based project plan would require, and companies who are committed to improving their ability to serve their customers will come to terms with this. In every CDI implementation I have been involved in, there has been an ROI model, but they have each been different - sometimes dramatically different - in the economic drivers for initiating the project. This is as it should be. Every company has a unique combination of technical environment and pre-existing infrastructure, channels for communicating with customers and processing orders, cost structures and revenue opportunities. I doubt one model can encompass every retail banking environment, much less every financial institution - and certainly not every industry.
So the success of CDI as an initiative on the drawing board of CTOs worldwide is likely to succeed in the executive offices and boardrooms of major corporations not on the basis of pure, hard, ROI cost-benefit data. It is going to succeed - or fail - on the ability of key CDI project sponsors to convey the vision, secure the executive participation, and create the sense of urgency to drive the project off the drawing board and into production.
Certainly more hard data will help. Even anecdotal evidence is significant when the volume grows to a point where trends can be identified. There are already a handful of useful metrics that have emerged from the collective CDI experience so far, and the favorable evidence is mounting.
0 Comments:
Post a Comment
<< Home