Let's assume for a minute that you want to start a new project. That new project could be a new business process, a new software application, or even a new addition to your home. The things one usually considers are: what are the costs, and what are the benefits of that project, and could I do something else with my time and resources that is more valuable?
This approach is always our inclination, but it is a very unfair and unfortunate comparison. In almost every case, the COSTS are relatively well known. Given just about any project, someone has likely done something similar before. Most folks are reasonably good about cost estimation, especially with projects they've seen before. Now, some projects, like the Big Dig in Boston, just seem to mushroom out of control from a cost perspective. That's a sign of bad management and poor estimating and scope control. Note that costs almost never go down, only up, so it's relatively easy to say - "Let's estimate the costs at $100 since that was the cost of the last similar project, and let's throw in another 15% contingency factor". Since most projects are based on or are similar to things we've done before, we can usually get into the ballpark on the cost side. Even if we miss, we know which way we'll miss - we'll underestimate costs, so most people add a contingency factor to any estimate.
On the BENEFITS side of the equation, however, we usually generate all kinds of models and assumptions about what will happen and how we'll reduce costs or generate more revenue or both. These models are almost always built on assumptions on top of assumptions, and are usually wrong on two counts - timing and size. We generally are overly optimistic on the implementation of a project and the speed of adoption and how quickly the benefits will accrue, and overly optimistic on the size of the returns. What's really difficult is quantifying in any reasonable form the value of the benefits of a project. It surprises me that so many get started, given how much more clearly defined the cost side of the equation is versus the benefits side of the equation. I have to admit this is one place that the venture community does a great job.
Even at times when the benefits seem obvious, it can be exceptionally difficult to place a value or price tag on those benefits. For example, there are software applications that help "speed" business processes and shorten cycle times. Can you place a value on that? Certainly doing things faster with the same amount of quality has value. But how does one value that?
The models right now are also confusing. Most new applications seem to have little "value" in terms of traditional models. MySpace, Skype, Google and other applications are powerful and for all intents free, yet they are very valuable. MySpace creates value by driving a significant number of people to a place where advertisers can show their stuff, so clearly one useful benefit model is attracting a valuable user segment who will view ads. Skype provided a free service using existing IP protocol to undercut international long distance, and according to recent filings will contribute about $40 million to e-Bay, which paid over $2B for it. Google provides all of its applications for free - some of which are comparable to applications we'd happily pay a significant monthly price for, yet it spins off cash. These models leave many of us scratching our heads, wondering about the appropriate benefits and business models to drive value and ultimately profits.
Since costs are relatively fixed - sure you can outsource and keep your overheads low, but you still have to pay for those services - and business models and benefits are hard to pin down, how can we continue to make this simple investment/benefit comparison? To remove risk from the benefit side, the one take away I can find from MySpace, Skype and Google is to build small, fast applications or products that delight a core group of users who spread the word via viral marketing and word of mouth. Or, of course, build everything with the assumption that we can find a method to use it in an advertising stream.
I'd like to hear your thoughts. How do you make sense of the "benefits" side of the equation?
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