Steven Kury: Interactive Media Development, Business Analyltics and Strategy

What's it Worth?

Have you ever wondered what a project is actually worth to a client?  It can be quite surprising.

The first two aspects of project value are obvious.  They are (1) the revenue that will be generated for your client, and (2) the money that will be saved for your client.  These are projected in a process called capital budgeting.  When a company has a limited amount of capital to invest, it uses this process to determine which investment option is more attractive.  The company creates a list of possible projects that it can invest in and evaluates each one for its expected effect on future cash flows.

This is done by calculating a net present value (NPV) for each prospective project.  The NPV is the sum of the expected cash flows derived from the project.  They are easily developed in a spreadsheet program such as MS Excel.  To illustrate how they work, look at the sample below for a hypothetical IT project. (This is a very simple example.  Actual NPV calculations can be much more intricate than this, and include more years, but it illustrates the point.)


Spreadsheet calculation of an NPV.

It shows the initial investment in year one of the project and the expected maintenance costs, efficiency savings, and increased revenues for four years following the initial investment.  These are totaled for each year and adjusted to a present value for that future year’s total.  The calculation of the present value of each year’s total cash flow increase is very important.  The guiding principle here is that any amount of money that you expect to receive in the future is worth less than if you had it in hand at present.  It adjusts the expected cash flow for that year to reflect, among other things, the effects of inflation by that point in time and the risk that the project will be discontinued and produce nothing. (The discount rate is an integral part of this calculation, but how it plays into this calculation is beyond the scope of this article.  Contact me if learning how it works is of interest to you.)  The sum total of these present values for the future cash flows of the project are its net present value.  The net present value of this hypothetical project is $46,819, and its return on investment (ROI) is 19%.

This process would be repeated for each of the prospective projects that the company is considering, and the one(s) with the highest ROI would be selected.

For an IT integration project, such as installing a new CRM system, these numbers are fairly straight forward and easy to project.  They could be the savings due to increased efficiencies associated with fewer people having to handle a customer's documents, such as insurance applications, and the increased revenues associated with it because the company could advertise a faster and easier application process.

For a marketing project, the results are harder to forecast.  These might include the portion of the target market that converts to a client’s brand and purchases its product.  Mitigating factors could include disruptive effects by competitors’ marketing plans, new competitors, legal and regulatory developments, and macroeconomic factors beyond the client’s control.  However, they are still projectable within a best-medium-worst case scenario framework.

The third aspect of project value to a client is less apparent.  This is the long term strategic goal.  For instance, the goal of the project may not be immediate revenues, but establishing a market condition for the company to capitalize on in the not so near term.

I once worked on a well known Internet software product, developing a new feature of dubious financial value.  The strategic significance of the feature was that it enabled the claim that the product “did everything” as far as Internet content development was concerned.  If a customer was wavering between purchasing or not purchasing the product, this feature could be the factor swayed them towards the purchase decision.

Additionally, if certain Internet trends became general standards, the demand for this feature would certainly have increased.  The company was setting itself up for the event that these trends would become universal, in which case the feature would become valuable.

The next time you wonder what a project is worth to a client, you will have a framework for estimating the value.  Hopefully this understanding will enable you to ask some sharp questions for understanding it, and also to propose some strategic features and modifications to add to it.

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Steven Kury, MBA, is an interactive media developer and producer.  Over the past 12 years he has contributed to several rich Internet application (RIA) systems, as well as a breadth of marketing communications solutions.  Contact him at steve@steve-kury.biz or (717) 350-6781 to discuss what he can contribute to your project.