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May 11, 2005

Investing in Returns on Infrastructure

ROI doesn't just come to the party with an invitation in hand. Instead, it must be brought to the party by the host. The activities for making that happen are numerous and even predictable to an extent, but there is no one-size-fits all methodology. Instead, opportunities for actively cultivating ROI are found in various levels and dimensions of management. Several of these, associated with production infrastructures, are surveyed below.

Getting the value of Processes
Process integration in effect dynamically prioritizes the selection of supporting resources to consume for the purpose of assuring focus on the value proposition (goal) of the process. Then the integrated processes also provide efficiency in actually provisioning those resources on demand.

The immediate payoff of that one-two punch is effective navigation of the complexity of the operations infrastructure, allowing sustained productivity and expansion of capacity for productivity. The effectiveness can be verbally expressed as "getting the right thing to the right place at the right time for the right reason." Placing a value on that effectiveness sets one term of the "ROI" of implementing the integrated processes. The other term is the cost of executing the implementation.

Value
Value is defined as the significance of a difference.

The most important aspect of evaluating the difference is to distinguish between whether things have just gotten different versus whether they have actually gotten "better". This means that the only real meaning of an ROI calculation must logically come from the original definition of what represents "better".

Typical examples of "better" are:
- faster cycle time
- lower opportunity cost
- increased re-usability of employed resources
- greater scale of process availability

But even those examples are arbitrary unless they are causally (logically) associated with a higher-level business performance need – such as competition, compliance, reorganization or growth.

Cost
Meanwhile, cost must also be properly defined. When what is being considered is "expense", cost seems obvious – but a line-item expense does not automatically include consideration of: the cost of the funds; nor the unavailability of those same funds to other purposes (that may also either earn more money or spend more); nor the additional expense of maintaining the target outcome of the initial expense; nor the disposition of the expense amount against the time period, and/or the changes, of the demand for the funds.

In general, those additional considerations (and more) are assumed to be covered by the "expense approval" process. The key observation here is that the presumed final value of a proposed expense may be irrelevant to the importance of using the funds, unless that value is clearly competitive with (and probably superior to) other options of equal spending opportunity. In order to know what the best calculable choice should be, a minimum level of real-time business intelligence is required to support decision-makers. Decision makers should look for expenses that actually represent effective total costs.

Value versus Cost in ROI
The relationship of cost to value will show that overall operational improvement should take place as a matter of optimizing procedures at a target scale within the constraints of cost-effectiveness, for a defined goal.

Optimization, scale, and constraints can all be separately modeled and then interrelated in deployment. For example, workflow running at an enterprise scale under a policy is a demonstration of modeled relations comprising an operation.

The investment in this includes:
- all measures taken to conduct the goal-seeking.

The return in this includes:
- the impact of the amount of the goal achieved by the effort, versus the impact of the prior "as is" conditions.

A related way to represent the visibility of the ROI is through a portfolio within which any given category of investment is handled with business process management.

Architecture
The purpose of architecture is to bring cost-effectiveness to sustaining the quality of the process throughout the lifetime of the demand on the process.

This means that the quality of the process must be defined. The definition normally starts with the selection of outcomes to attribute to the influence of the process, followed by determination of requirements for supporting those outcomes, and then by identifying utilization of resources to attend to the requirements.

This shows that quality is about fit-to-purpose, which makes quality variable in two ways:
- relative fit against variations of purpose
- absolute fit to a fixed purpose

Associating "investment" and "architecture" is logical because both have the aim of establishing a foundational environment for producing against requirements. The production methodology utilized at any time is literally based on the foundation, but this makes sense only because the foundation is a resource supply. So the logic of the foundation (i.e., investments or architecture) is in the way it offers "resources" on-demand.

Assets
By definition, a resource is an asset that has an assigned job. This means that the "assets" used to make up the investment or architecture must be subject to some function that converts the asset into a resource. (The question of whether the resource is passive or active in its assignment at any given time is a different issue, one that is not essential to the distinction of whether the asset is a resource or is not a resource.)

When committing an asset as a resource, economy of scope, not economy of scale, is the main economic issue in the allocation of the asset.

In investment and in architecture, the purpose of the resource is to be consumed by the assignment – which makes the economics of the resource a matter of how much of an intended effect can be generated by the consumption before the resource is exhausted. This makes the pattern or mode of consumption a key factor, since there is the problem of whether the consumption wastes the resource or not. The flip side of the consumption pattern is the quality of the asset that allows itself to be consumed in the role of being a resource.

Thus, a formulation very basic to the calculation for ROI is the statistical correlation of the engineered quality of the asset to the probable impact of a given consumption mode. For example, an old VW Beetle in the hands of a highly competent adult driver will likely be a more "productive" combination than a Ferrari in the hands of an inexperienced teen.

BUT, the economics problem is not to know what is the capacity of the asset to support some level of demand for one effect (economy of scale).

Instead the problem is to know what breadth of effects can be and may need to be supported by the asset (economy of scope).

That is, the qualities of the asset must offer a degree of versatility that is appropriate only to the controllable range of "necessary" patterns of resource consumption that it will host. This brings out another issue, which is the use of control mechanisms (disciplines) and judgments of necessity (priorities, or in effect, policies).

Modeling ROI
So the ROI is really a calculation that refers to an outcome based on a set of four interrelated and variable aspects:

- quality (engineered) of the base asset
- security of the asset’s assignment to a role (making it a resource)
- control of the consumption imposed on the resource
- predictability of the requirement for consumption.

We can generally say that to start things off a "cost" (via either build or buy) develops the availability of the asset. However, that cost is a long way from being a predictor of the ultimate "benefit". The expectation of the benefit is most often predicated on making all of the four variables as little variable as possible. This so-called "optimization" might raise confidence levels, but it also makes the fully interconnected set of aspects more rigid, and therefore less likely suitable to conditions outside of the declared tolerances. Thus, in conditions of change and uncertainty, the optimized set is more risky. Consequently, the next concern becomes to make this risk affordable, or (to emphasize the point) "tolerably disposable" – which is what is really at the heart of the goal of "agility".

That concern pressures the entire set of variables to be obtainable at the lowest cost and/or at the highest "billable" rate of employment. The main problem here lies in the case where the beneficiary of the set must also be the supplier – in which case, on the way to determining ROI, the (approved) expense of self-provision must be subtracted from the presumed income of the benefit to discover if agility is in the cards.

Assuming affordability, it follows that this is a point at which focus should be placed mainly on the competency necessary to generate the benefit.

"Competency" is the ability to meet necessary performance levels under circumstantial demand. Differently, "capabilities" are persistent mechanical components of the competency. Ideally, constituent capabilities can be improved to drive greater competency. In this perspective, the supporting capabilities need to be exchangeable without altering the target competency, because relative improvement in capability may come through either modifying (upgrading) old capabilities or replacing them with different new ones.

Capability improvements are generally viewed as either increased "effectiveness" or increased "maturity". But the two are not similar. While effectiveness normally indicates "strength of impact", maturity normally indicates "consistency of required impact", which is really in other words "quality".

Risk vs. Benefit in ROI
With that observation, the concern of "capability maturity models" is recognizable as being about specified quality levels, with higher levels actually representing less risk as opposed to more effectiveness.

This natural objective of increasing "capability maturity" is to bring more ability to define (and limit) the range of variability in the four interrelated aspects of driving targeted (i.e., pre-specified) operational benefit.

The greatest significance of that change in ability is that by reducing the likelihood of waste against the target, it increases the probable value-contribution of predefined resources and predefined patterns of resource consumption.

However, since more rigidity in the production also increases operational risk under conditions of uncertainty, the logical strategic addition to this improvement is to contain the extent of the risk by limiting the scope of predefined production assigned to the set of variables. That is, "modules" of production capability will be defined.

In most cases, this turns into an approach of achieving greater overall operational scope by combining (integrating) several high-quality modules of production, each having a distinctive functional responsibility treated as a constituent capability.

Once these modules are defined, their utilization drives their economic impact, which is not the same as the ROI of the processes that they support. Again, the greatest importance of these modules (or optimized capabilities) is in how much more the impact of their utilization results in achievement of goals when compared with the use of the current-state infrastructure to pursue those same goals.

Investing in the Return
Summing up, the "return" on an investment is described as:
- how much improvement has been obtained in…
- the ability to carry the risk that is inherent in…
- requirements for supporting the process of…
- meeting targeted levels of performance in…
- pursuing a defined goal.

Posted by Malcolm Ryder at May 11, 2005 11:05 AM

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