The “S” Word

Addressing claims of “strategic” value when the hard numbers weren’t enough

“This project has strategic value.”

That phrase usually pops up when the numbers don’t show shareholder value – but we want to do it anyway.

Certainly, strategic value exists and comes in many forms (e.g. customer satisfaction, competitive position, employee morale) yet it can defy reliable measurement. To illustrate, how can we ever track how many additions sales the Nordstrom pianist actually generates?

So is “strategic value” a trump card that must force decision-makers to abandon hope of a clear justification for these projects? For example, imagine you are asked to approve a cutting-edge sales system but estimates of the hard benefits (reduced operating costs, etc.) don’t provide a sufficient financial return. The project team, however, believes the new system will improve customer satisfaction and indirectly increase sales. How much is speculation? Vague arm waving around such strategic value does not deliver what decision-makers are entitled to: clear justifications.

One reaction, demanding project teams simply do their best to put numbers to these strategic benefits, does not work either. If the team was already convinced their recommendation is right, we can confidently bet their numbers are reverse-engineered. For example, armed with the knowledge that the project needs X dollars of additional sales due to the new software we generally:

  1. Calculate out how many additional units our happier customers must buy to bridge that gap,
  2. Assure ourselves this is achievable, and
  3. Describe those projections as “conservative estimates”

While this is the way we naturally approach these challenges, the results are wholly unreliable.

Door Number 3

Between a leap of faith and teams reverse-engineering numbers is another path: a blind estimate by a third party. “Blind” means the person or group providing the estimate has no knowledge of how much value is needed to justify the project. Simple independence from the project team is not sufficient. Due to a bias called “Anchoring and Adjustment”, mere knowledge of that value influences even a third party’s judgment. It’s a bizarre phenomenon (see the weird examples under “Anchoring and Adjustment” here).

So with our sales system example, the valuation process needs a knowledgeable third party to estimate the additional “customer satisfaction” sales WITHOUT disclosing the team’s estimate or the gap we are trying to bridge. The estimates still border on speculation (remember the Nordstrom piano comparison), but at least it is free of the reverse-engineering bias.

A Parting Reminder That We Are All Human

As a side note, Anchoring and Adjustment influences all of us, including executive decision-makers. For this reason, we can’t rely upon our own ability to weed out overly optimistic estimates of strategic value at approval meetings (and do we really have the time to?). Once we have seen the team’s estimate the odds are heavily against us producing our own unbiased estimate.

© Dave Wittenberg