CIO Mantra: Assessing Value of Software Asset
Have you ever looked at a financial report of any reputed company and asked the CFO a question on the lines of what are the assets of the company? The answer you get will be in typical finance terms like infrastructure, buildings, land, machinery etc. A value is always associated with these assets.
If you pose same question to a CIO in terms of value of software assets; in most cases the answer is not as clear as you get in earlier case. Does it mean in the IT department, there are no assets with value associated or there is no standard mechanism to identify assets and assign value, or no one has looked at software artifacts as an asset? Let's deep dive, to get answers to some of these questions that are relevant to us.
In most of the cases, code artifacts were written long ago. The same piece of code is developed, maintained, upgraded by IT and used for supporting day to day business decisions. It has lot of business knowledge/processes embedded in it. It is the same piece of code that differentiates businesses from competition. So if the organizations are achieving success by using IT as a backbone then most of them will agree that software produced/managed by IT is an important asset that a CIO owns. It is important because it has value associated with it and it can be a potential source of future revenue streams. These assets are not necessarily only code artifacts but can even be systems, methodologies, processes, tools that are unique to the organization.
Once you start looking at software artifacts as an assets then whole perspective changes. Pertinent questions like the one's mentioned below are raised.
- What is the potential value associated with it?
- Do we need to have overall strategy to manage these assets?
- Are we putting sufficient effort to identify right set of assets?
- Are we defining it in right manner so that it can be used across groups?
- Do we have strategy to maintain, enhance and distribute it in seamless manner?
The questions are not limited to these and there could be many more.
Assets are enterprise resources and organizations will define effective strategy to deal with it only if they see value in it. Now value does not exist in the abstract form and must be addressed within the context of time, place, and potential of the asset. In general, there are three standard mechanisms to find the value associated with software assets.
- Cost based Value
- Market Based Value
- Income Base Value
Cost Based Value is a conservative approach. It is commonly known as accounting approach. In this approach value of the asset is decided based on cost of development or cost of replacement or replication.
Market based value approach focuses on comparing the asset with a similar asset in the market or the kind of revenues that the asset could garner in the market. This approach often assumes future benefit and values, which are yet to be captured by brand valuation. Typically it considers M&A scenarios to calculate the value of assets.
Income based approach focuses on projected cash flow that can be earned from asset either by selling or licensing it for the duration of asset life.
Apart from these methods, the asset value is also dependent on various factors like nature of the asset - Is it a product or a onetime custom build, usage of asset, technical health of the asset, agility etc.
Once organizations agree that their assets are valuable, then putting a strategy in place to manage the assets becomes a natural step.
An Organization's asset management strategy should address key things like asset creation, if created then segregation, knowledge dissemination, branding of assets , reuse across groups and of course the commercial benefit. The overall approach from creation to reuse will change the way artifacts are designed, implemented and released. Sheer focus on reuse will force the organization DNA to change and the overall community will be benefited.
The assets need to influence the future implementation to save cost, improve time and reduce business risk. In some cases these assets are very novel and can be converted into IP's. It leads to legal protection of asset and opens up new revenue generation avenues for the company.
Infosys has recognized the need for a full-fledged service offering around building custom applications using assets. These assets can be from a client's existing IT portfolio or could be Infosys' assets or third party assets. To support this service, new assembly development processes are being developed. Various sophisticated tools to store/host assets and to stitch them together to form custom applications are being developed. This asset based development service will effectively deliver future custom developed applications for selected line of businesses. Focus on particular line of business will enable organizations to create business as well as technical assets in that particular area. In turn it will help reduce development cost and define to deploy cycle.
This whole paradigm shift will enforce client organization CIOs to think differently. If CFOs are taking pride in reporting metrics around tangible infrastructure assets then the day is not far when CIOs will take pride and start reporting some of their metrics based on value generated out of their IT assets.