Wednesday, October 25, 2006

What's Value worth?

What's the difference between an IT consultant who charges you $10,000 per day and one that charges you about $1,000 per day?

Usually about $9,000 ...

This is old stuff which I presented back at Euro Foo 2004, but it seems at the moment a lot of my friends are talking about it again.

The problem is ... what is something worth?

In the world of IT there are some attempts made to equate CODB type services (in some cases labelled as "strategic" in much the same way that having power for your building is also a "strategic" choice) to a notion of worth. These rarely consider any market effect (see the Warren Buffet loom example and why investing in something which improves productivity may not be a good idea) and returns do not always live up to expectation (assuming they are ever measured).

In reality many of these projects don't add any value - however they are needed to compete as a CODB (the IT arms race argument) - so what are they worth? Well, the least you can get away with - "Cheap as Chips".

This doesn't mean that all such projects don't create value - some are novel, new and with real return. These differentiators, CA like projects are worth something - but as the worth is related to the value they generate, and as this is uncertain (being something novel and new) it doesn't fit in well with cost focused fixed budgetting.

These projects are more suited to a VC type method of funding, but that involves different mechansisms of finance, calculation of risk and willingness to gamble.

However in the IT arms race, where there is often little or no link between value creation and IT spending (Strassmann etc) because of the mix of the majority CODB (often labelled "strategic"), minority CA (the ones which create value but have the biggest hurdles) and the big puddle of in-between projects being treated in the same way - most people seem to act in cost focused manner.

No suprise really.

Creating a link between worth and cost is not any easy task - you need to understand value, risk and be willing if necessary to take a stake. But creating a link between percieved value and cost is subjective and easy - it's often the other side of the same coin.

Which means you can just as easily underprice yourself as overprice, as the perceived value of your advice is often linked to what you charge for it - regardless of the actual value (and hence it's worth).

Of course, this isn't a good thing.