Does Cost Determine Value?
Scott Withrow, in this week’s CNET App Dev Manager newsletter, talks about putting appropriate value on IT assets. He says that in addition to function,
Other factors to consider when determining an IT asset’s value include:
- Original development costs, licensing, infrastructure, and other standard tangible costs
- Costs to replace, acquire, or reengineer the asset
- Operational costs to support and execute the asset
- Business value retained by the successful operation of the asset
- Costs related to the operational impact when the asset is unavailable
- Value of the asset to the competition
- Value of the intellectual property associated with the asset
- Litigation costs associated with the unavailability of the asset
- Loss of competitive advantage, sales, goodwill, and market share due to asset unavailability
But do costs, even replacement costs, determine value? I think this is one of those nasty management issues that we have yet to properly resolve in IT. Just because you got me to spend $65M on a project doesn’t mean that its value isn’t a tenth of that. Costs do not determine value but can determine the value of replacement.
Citing any initial costs as determining value is the fallacy of sunk costs, where “I’ve spent too much to back out now.” Actually, whether or not you back out is determined by whether or not it makes sense to spend today’s money. If it doesn’t, you simply made an error. Often a million dollar error, but an error nonetheless.
It may just be how you determine value. Ideally, one would determine what you get vs what you have to spend and get some net return.
Interestingly, as I finally put this up after letting it “age” for about a year, McKinsey announced their new collection,Valuation: Measuring and Managing the Value of Companies, by Tim Koller, Marc Goedhart, and David Wessels. In several of the articles, the authors describe how share price may not reflect the actual value of the corporation, either short- or mid-term, forgetting long-term. “Developing a holistic picture of the health of a companyÃ¢â‚¬â€its ability to generate and sustain valueÃ¢â‚¬â€is difficult but doable.” Perhaps we need a similar holistic measure of IT health, an acknowledgement of the intangibles such as the mētis of the locals and the adaptability of the systems. Unfortunately, the value of any of these hinges upon other variables. For example, adaptability is good but at what point does it become pathological, always adapting and never “being”?
But let us start by admitting that cost does not determine value in any work.