Premise and Conclusion

The Value of Decisions
New Ideas on the ROI of Business Rules

by Ronald G. Ross

Cost-justifying business rule initiatives has always been problematic.  In our experience, most have never been cost-justified at all -- rather they are undertaken because management comes to understand there is no viable alternative for some critical problem at hand.  And when the initiatives prove successful, there's no need to deconstruct their success.

But management is right to want analysis of the ROI, especially in companies without prior experience in the area.  Now there is a new way to think about the ROI of business rules.  Ironically, it comes from not looking at the rules at all.

In their new book, Smart (Enough) Systems^[1], Neil Raden and James Taylor argue convincingly that it's some decision that rules can be used to make that provides the actual value-add for the business -- not the rules per se.  As I discussed in last month's column, they look at rules simply as the means to some important business end, some operational decision(s) to be made.  So the EDM message is that you shouldn't talk to business executives about the means (rules) when it's the ends (decisions) that really matter.  It's simply the wrong artifact.  Extrapolating, it's the ROI from the decision that should be examined if you want to do cost-benefit analysis, not from the 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 decisions?"  These front-line decisions are everywhere -- so numerous, in fact, they are easy to miss.  Consider the following 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.

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 business logic as possible to business people, and providing a persistent, generalized infrastructure for making changes to that business 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 rules.

References

[1] Neil Raden and James Taylor.  Smart (Enough) Systems:  How to Deliver Competitive Advantage by Automating Hidden Decisions.  Prentice-Hall (June 2007).  ISBN:  0132347962

[2] In an appendix, Raden and Taylor introduce a new approach to evaluate the ROI of decisions, not discussed here, called Decision Yield.