Corporations have come a long way in identifying data as a corporate asset. Like all other corporate assets, data needs to be maintained, serviced and worth the investment. It is difficult for an organization to treat data in the same way as any other corporate asset because data is not tangible, data doesnt have value, there is no return on asset calculation for data, and generally accepted accounting principles do not recognize data as an asset in an organizations financial statements unless it has been purchased. Because different users have different perceptions of the importance of the data, its not managed and valued consistently across the enterprise.
Any organization can be seen as a data factory. Data needs of various business departments can be divided as investment, operations and distribution data. Localization of common data results in lack of data ownership, difficulties accessing data maintenance nightmares and inaccurate, redundant and inconsistent data. So it is imperative that all business processes of different departments use the same core master data. Hence the drive for centralization of master data.
Master data management competes with front-office initiatives for budget. Most front-office initiatives have visible and quantifiable benefits as compared to benefits from MDM, which are realized over a period of time and are difficult to quantify. An MDM program is often seen as a long-term project with complicated planning. It seems like an expensive exercise with risks galore.
The first thing to do before starting an MDM initiative is to educate the business to recognize the importance of data by linking it to company strategy. Every dollar spent by an organization should count toward one of the following objectives: to increase revenue or the value of assets, or to reduce costs or complexity.
The best way to justify any funded activity in a firm is to strongly correlate the components of the activity to one of these objectives. So potential benefits of MDM need to be quantified in a way that is convincing to the stakeholders.
Quantify potential Benefits of MDM
Net present value is one of the better methods to quantify the benefits and in turn justify the choice of a project in the capital budgeting process.
The basic idea of NPV is that $100 now is better than $100 in five years because over five years that $100 would have an opportunity to grow. To put it in another way, NPV accounts for time value of money. Knowing that $100 now is better than $100 later is good; we now need a way to quantify the differences in the two cash flows. To do this, we discount the cash flow with an acceptable interest rate (normally Weighted Average Cost of Capital- WACC). NPV is the sum of all the discounted cash flows associated with a project. A project adds economic value to the firm if its NPV is positive. NPV for a project can be calculated using the below formula: NPV = Initial outlay + (periodic cash inflows/discount rate) + (terminal cash inflow/discount rate)
Dealing with initial outflow: For an MDM initiative, we need to estimate the initial cash outflow, which is the total project cost. As mentioned, MDM program is often seen as a long-term project with complicated planning. So, many a times, an MDM initiative involves only cash outflow with no visible benefits in terms of cash inflow. An MDM program can be sliced into manageable and self-contained deliverables, which have benefits in dollar terms associated with them. This leads to shorter realization time for each deliverable. In this way, each deliverable can be implemented fairly independently and quickly with visible cash inflow. The second benefit of manageable and independent deliverables is that they increase the confidence level of executives, as lead to timely implementation of the project. As pointed out by the Data Governance Institute, executives are ready to accept a decrease in the magnitude of NPV for more certainty in the implementation of the project.
Dealing with cash inflows: Cash inflow from MDM initiative can be direct or indirect. Direct contributors have one degree of separation from the dollar value benefit, so its easy to calculate the cash inflow for these kinds of projects. Generating downstream feeds for external clients through an MDM platform is one such example. These projects can easily be termed revenue-generating projects of the MDM initiative. Indirect contributors have two degrees of separation from a dollar value benefit. These projects are complimentary to other revenue-generating projects or help in smooth implementation of such project. Consider a marketing campaign where a firm offers credit to students. The marketing department can conduct only four campaigns as significant amount of their time is spent filtering and combining data sets. Time taken for preparatory work for the campaigns can be reduced by doing a small project using MDM infrastructure. Now this MDM project is contributing to the revenue-generating project, which in turn shows dollar value benefits. We can multiply the dollar value of the main project with a factor that signifies the contribution of MDM project. The resulting number is the dollar value benefit of the MDM project. Thus, cash inflow for indirect contributors can be calculated. An MDM initiative can result into another stream of cash inflows wherein cash is not generated but saved. This stream can be called an IT investment avoidance stream. The MDM platform can result into data feed rationalization and decommissioning of some of the existing applications. Every dollar saved in terms of license fees and application maintenance can be counted as cash inflow for that year. The sum of these cash inflows can be discounted at a suitable rate; usually the WACC for the firm.
Dealing with terminal cash flows: Terminal cash flows include cash inflows resulting from revenue-generating/cost-saving projects and the cash saved due to the release of resources tied to the project. Discount the cash flows with WACC as that discount rate. NPV is calculated by plugging initial cash outlay, discounted cash inflows and discounted terminal cash flow. The resulting NPV value quantifies the benefits of the MDM initiative. It goes a long way in justifying the MDM initiative.
Synergies created as a result of an MDM initiative lead to revenue-generating or cost-reduction opportunities. Cost synergies are typically achieved through economies of scale as standardized and streamlined processes result into less fixed costs for any new enhancement request from any of the business units in an organization. Revenue-generating opportunities are created as data is available in standard form and of high quality. Such data can be packaged fairly quickly into any form according to the requirements of the client.
Put another way, an MDM initiative can be considered as a near-total horizontal integration of data-related activities in a firm which creates a monopoly in rapid response to data-related needs.
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