AM/FM/GIS Investment Analysis
An investment analysis is the appropriate methodology for valuing your
AM/FM/GIS project. An 1A, including the CBA, will produce much better
information for decision-making in today’s business environment.
346?In an investment analysis (1A) we see four especially notable topics. First, 1A
includes company, market competition and risk factors not included in a CBA
(see Hares, 1995). It is important to understand the company mission, goals and
objectives for they are the foundation upon which value judgments must be made.
Knowing one’s marketplace, the opportunities as well as the competitive threats
provides basic information for evaluating alternative investment opportunities.
Risk is very often inadequately covered in project valuations. Most often company
risk is calculated as a discount rate and an expected return formula is used to
establish value. But this is not enough. There are project risks and event risks
for which an additional discount rate and probabilities of occurrence need to be
calculated.
Second, it provides techniques for measuring market risk, project risk, event risk
and flexibility, intangibles, project synergies and benefit realization. We have
discussed risks. There are now valid techniques to calculate the value of any
flexibility applied to a project. Flexibility will, if it costs less than the project risks,
increase the benefit value of an AM/FM/GIS project. There are many intangibles.
Traditional benefit types 3, 4 and 5- response to unanticipated events, generaI
intangibles and revenue generation - are but three categories. The value of
response to a variety of unanticipated events may be large or small depending on
the event. Today it is important also to calculate the cost if a business is unable
to respond to an unanticipated event.
General intangibles accruing to investments in AM/FM/GIS technology can be
thought of in four categories (in increasing difficulty of measurement);
- Internal improvements relating to resources
- Customer service - quality, delivery and support
- Foresight - markets, products and operations
- Adaptability - products, scale and mix
Project synergy is most simply the impact of the AM/FM/GIS project on other
information technology projects. Projects may have opportunities to share costs
so that the benefit of two projects taken together may be greater than the sum of
the two projects taken standalone. Project synergies may be temporal as well. A
current project investment may have a minimal value today, but be the keystone
for future high value projects.
Benefit realization may be valued directly as well as in many indirect ways. One
indirect example is the value of object-oriented technology over the life of an
AM/FM/GIS project. Cost profiles show that after the first implementation, object
oriented AM/FM/GIS systems have considerably less cost and risk over the
project life than conventional ones.
Third, if properly performed, 1Aevaluates these items in the context of a complete
business. The structure of the 1Amethod includes four modules. They are
deliberately numbered Oto 3, as the Oindicates that no techniques are applied.
Each module serves as an objective of the method and its title is descriptive of
that objective.
Module O- Corporate business strategy
Module 1- Investment investigation
1. Establish investment appraisal baseline
2. Identify investment opportunities.
Module 2- Investment measurement
Module 3- Benefits realization
The business strategy module defines the particular business strategy for the
enterprise providing certain goods and services within specific market sectors.
The investment investigation module is concerned with the identification and
planning of investment opportunities. These are projects which are financially
viable as well as enabling business objectives to be achieved. The investment
measurement module is the major part of the method and is discussed in
following paragraphs. The final module is the benefits realization module which
assesses whether the benefits claimed for the project are being achieved once
the system is installed.
Fourth, it evaluates the impact of the investment on the Critical Success Factors
(CSFS) for the entire enterprise. CSFS are the ultimate source of all information in
the company’s computer system and hence the basis of the logical data model for
the value components. CSFS are the limited areas in which satisfactory results
will ensure competitive performance for the individual, department or
organization. They indicate one’s “business health” vis-a-vis competitors. CFSS
are often intangibles such as the following;
a. Customer satisfaction d. Premium service
b. Product/service quality e. Speed of service
c. Product/service reliability f. Product presentation
1Aprovides a structured, three step quantification technique to convert intangible
benefits into measurable dollars. Once the benefits are identified, step one is to
make them measurable through their ability to;
a. Maintain sales d. Save money
b. Sell more e. Create new business
c. Charge a higher price
Step two is to then convert the measurable into actual numbers by predicting, in
physical terms, the resulting numbers. This is the largest, most important and
most difficult of the quantification steps. There are essentially three ways in
which the measurable can be converted into actual numbers;
1. Market surveys - generally the best approach
2. Management estimates -by senior managers of operations supported
by the AM/FM/GIS project
3. Comparative case studies - a similar but not identical situation, a sign
of weakness
Clearly either of the first two are preferable. The market survey is best because it
is the market that ultimately determines the actual numbers.
The third and final step is to evaluate the entire project in cash flow terms. This
is a simple monetary process in which the physical volumes from the previous
step are related to the monetary value of the benefit.
As an example of how investment analysis can be helpful in valuing your
AM/FM/GIS investment, consider the following simple situation. Starting with the
traditional CBA a project enhancement plan was evaluated to have a cost of 1.2
M$ and a non-discounted benefit over a three year life of 1.8 M$. This could be
thought of as a simple 50% benefit of investment. However when the project was
valued using 1Atechniques it was found that a 75 K$ increase in the cost (a
6.25% increase) to 1.275 M$ to include business geographies, increased the
benefits, primarily from synergies, new customers and customized service
offerings, to 2.193 M$ or a simple 72% benefit of investment. Hence, in this
example a 6.25% increase in cost resulted in a 44% increase in the simple benefit
of the investment.
Describing 1Afor valuing your AM/FM/GIS investment is neither short nor simple.
1Ais a complex undertaking. Indeed there are those who can use the
methodology with their own expert skills to produce actionable results in relatively
short time frames. It is most important to state strongly and clearly that 1Ais a
rigorous accounting methodology. More about investment analysis can be found
in the book Measuring the Value of Information Technoiocw written by two
Englishmen, John Hares and Duncan Royle and published in 1995 by John Wiley
& Sons.
Summary
Investment Analysis is a proven methodology for measuring the financial value of
an AM/FM/GIS investment. It is, if we have a good sense of where tomorrow’s
profits will be earned, and when combined with a cost benefit analysis, the basis
of better, more informed decision-making.
References
Batty, P. M., 1996: The Impact of New Technologies on AM/FM/GIS:
Proceedings of AM/FM International Conference XIX
Emery, H.A., 1995: The Emery Chronicles: Vol. 1, No. 3:
Hares, J. and Royle, D., 1995: Measuring the Value of Information Technology,
published by John Wiley& Sons
