Calculating the Value of Faster Time-To-Market

Executive Summary: One of the key selling points for application development outsourcers is faster time-to-market for the developed applications. Such claims should not be blindly accepted and must be financially evaluated. In many cases, however, the benefits are real and can amount to a 5 percent to 20 percent increase in the business value of the application to an organization. These gains are predominantly found in two areas (1) an increase in the number of months the application is used and (2) a decrease in the risk necessary to realize the benefits of the application.

The benefits of faster time-to-market for IT applications can not only be evaluated but a financial impact can also be attached. To do so, a clear understanding of current baselines and an estimate of the projected changes are required. These changes (and values) are predominant in two key areas and less so in a third.

Business Application Benefits Are Increased

Business benefits can be quantified only if business metrics and the relevant values associated with moving those metrics have been defined. Improving time-to-market will impact these metrics by providing:

• More months of business value. With faster application development and deployment, there will be more months of application usage within the same time interval. For example, with a three-year analysis that has a current expectation of 12 months of development and 24 months of usage, an improvement to nine months of development will gain three extra months of usage benefits. The financial impact of this improvement will be reflected in the additional three months of business value.
• Higher ROI. Moving from 24 months of benefits to 27 months of benefits increases the business value by 12.5 percent. Even without a discrete and prior calculation of expected business benefits of the application, a financial estimate of this impact can be made. Most organizations will not fund development unless it produces ROI of more than 30 percent. If the organization is likely to approve a development project using current methodologies and budget estimates, at least $1,300 in perceived benefits for each $1,000 of budget can be projected. Therefore, a 12.5 percent increase in usage and benefits will produce $162 more in benefits per $1,000 in budget.

Reducing Risks Is Key

Every estimate of costs and benefits is based on a set of assumptions, or risk factors. The further into the future we must look the greater the uncertainty and higher the risks. Shortening time-to-market will reduce these risks to costs and benefits, especially in the area of management (change of management or policy) and market (change in market or customer conditions) risks.

To value risk reduction, we consider the benefit estimates with current knowledge and assumptions about future conditions, which provides us an expected benefit estimate. Best case and worst case benefit numbers can then be calculated and taken into consideration if the expected scenario did not play out. This results in a range of possible outcomes for the benefits, and any individual organization will likely fall somewhere in this range of possible outcomes. A first approximation for the average value for the range of outcomes is the arithmetic mean of the worst, expected, and best case estimates. The difference in values between the risk adjusted estimates with both normal and faster assumptions represents the tangible value of the reduction in risk.

The Value Of Flexibility Or Options May Be Increased

Flexibility, which we use to measure the value of future options created by a technology, may also increase as a result of speeding time-to-market. The options created by the base investment could potentially have a longer period during in which they could be exercised if they were available sooner but maintained the same expiration date. For example, if we have an option that will be available for the 24 months that the application is in use, we can now have that option available for 27 months. However, past experience shows us that this increase is both difficult to explain and not particularly material.

Recommendations

What Users Evaluating Time-to-Market Should Do:

• Balance any increases in costs required to speed time-to-market against the gains in benefits or risk reduction that will occur.
• Include costs and time required outside of the specific application budget, such as writing and honing a requirements document and application specification, when considering outsourcing an application based on time-to-market claims.
• Ensure that someone will be accountable for capturing any claimed benefits. Without accountability value realization is hazy at best.