The value contract

Still more ideas from the SCIP annual conference in Chicago…

When I work with internal corporate practitioners of intelligence or research, one of my first recommendations is to run their operation as if it were a stand-alone business.  That is, with clients (managerial decision-makers), suppliers (databases, contractors, etc.), and possibly even rivals of their own-both internal and external.  This helps them determine where the value for their clients is, and how to maximize that value.

Few of the internal practitioners I’ve met charge back for their services—so they are essentially “free” to their users on a transactional basis.  In those rare cases where there is a charge-back system, there is a market value assigned to the function.  People either pay for the service at the quoted price, or they do not.  The user is the judge of what value is received, and whether it was “worth it”.

However, absent this market mechanism—which has its own drawbacks—there is no direct measure of value for intelligence.  There must be some proxy for it—typically informal conversations or a survey at budget time to the effect—Is this function worth its salt, or not?

There is a better way.  In my “Active Dialog” session during the SCIP annual conference in Chicago, I believe the group synthesized a very strong mechanism.  Here I’ve built mainly on comments made by Scott Leeb, currently a SCIP Director, and by Martha Matteo, a recent SCIP president.

It boils down to three fundamental recommendations:

  • Rather than do a periodic macro overall assessment of the intelligence function, why not build an assessment of the value proposition into each project—then aggregate the results to arrive at an overall assessment?
  • Rather than have some “third party” opinion about the value of the intelligence, why not have the users estimate this?
  • Rather than wait until some point in the future (which usually is budget time—often highly pressured and political) why not build the value proposition into the research process at the time it happens?

If you’re a contract intelligence provider, as I am, your value proposition is typically built into your proposal and contract.  But even if you’re an internal practitioner, it’s a good practice to have at least an informal “contract” with your user.  Here is what we’re agreeing to do, here are there sources we’ll need to do it, here are the deliverables we anticipate, here’s the timeline, here is how and when we’ll communicate with you—that kind of thing.

While you’re doing this, why not build in the value proposition up front?  How will this information be used, what is the decision it will impact, and – most important – what is the estimated value impact of that decision?  If the user is not able to specify the value by actually paying for the intelligence, let him or her “bid” by estimating in advance the economic value that it is expected to have.  This can be a condition of receiving what is an otherwise “free” service, and can also allow you as a provider to prioritize projects and allocate resources to fulfill them.

After the project is delivered, then you can have the user revisit and estimate the extent to which the “value contract” was fulfilled.  You could even have them score the project on, say, a 100-point scale.  This way, you’ll have a “value received” built into the project.  The formula for this on a project basis would be:

VR = EV * FS

where VR = Value Received (your final economic “score” for the project)

and EV = Expected Value of the project if its goals were completely realized

and FS = Fulfillment Score, i.e., the extent to which the project goals were realized.

The Expected Value (EV) is provided by the user up front.  The Fulfillment Score (FS) is provided by the user as part of a mini-evaluation after the project concludes.

At the end of any given period of time, you’ll have a database containing two user-calculated values (EV and FS), as well as a calculated value received (VR) for each project.   This can easily be set up and maintained in an Excel spreadsheet, like this:

PROJECT NUMBER

EXPECTED VALUE (EV)

FULFILLMENT SCORE (F)

VALUE RECEIVED (VR)

001

$EV001

%FS001

$VR001

002

$EV002

%FS002

$VR002

003

$EV003

%FS003

$VR003

N

$EVN

%FSN

$VRN

TOTAL



$TV

TV then becomes the numerator for an ROI calculation on the aggregate value of intelligence during a given period t.  If you include the cost of that intelligence as a denominator, you now have a formula for the ROI of intelligence (”return on intelligence”) for that period.

ROI = TV/C

where ROI = the return on intelligence for the period t

and TV = the total intelligence value received during the period t

and C = the cost of intelligence during the period t.

This simple mechanism builds a value calculation into each assignment, and makes it part of the user “cost” of undertaking that assignment.  Over the longer term, it gives you a rigorous, value-based, user-focused metric of your return on intelligence.

If this seems too complex to start with, a simplified version could be built using just “high-medium-low” ratings for each Expected Value and Fulfillment Score.  However, you’d then need some way to translate that into a measure of the actual financial value received.


One Response to “The value contract”

  1. Excellent article, Tim.

    My experience in the 80s & 90s in large companies, the approach you describe above was often used in negotiations between the line-of-business managers and the IT department.

    The business managers loved it because they frequently used the process to justify hiring external resources that could do much more in less time.

    The IT department sometimes liked it because they were often back-logged for months and getting projects off their plate was a good thing.

    Politically, IT departments did not want to lose control – so they used the need to coordinate all projects to fit within their corporate IT infrastructure to justify managing the external IT resources.

    The compromise seemed to work.

    Especially given a year of layoffs, CI departments are probably understaffed relative to the internal demand for their services…so it’s probably the best time to price their services…. and, at the same time, demonstrate how better CI tools and access to new information services would make them more productive (faster) and demonstrate the savings using the same model you describe.

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