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Business Value Measurement

Today the business enterprises, their customers, shareholders and others on whom the company performance has a direct impact are keen on analyzing the company on the basis of all current and futuristic aspects affecting the company. Traditional financial ratios like ROI, DCF methods, etc. were concerned with the current profitability of the concern. They failed to consider the futuristic value of the business. They also carry the disadvantage of not taking into account the futuristic risk and intangible assets that have a direct impact on company’s profitability.

The disadvantages of the traditional methods of analyzing the business value gave birth to newer techniques like Business Value Index, Total Economic Impact, VAL IT, Applied Information Economics etc. Companies such as Forrester, Intel, SAP did pioneering work on these techniques

· Business Value Index (BVI)
Business Value Index takes into account different aspects of the business like risk and revenue, customer requirements, investment requirement, etc. According to Intel, by tracking and measuring the benefits of different projects, the company strategy can be proposed by prioritizing the proposals on the basis of the risks and benefits computed using the index. Thus it is a strategic tool that helps the company to concentrate on those proposals which provide maximum return to the investment. It is a useful tool as it aids in investment decisions by prioritizing the various proposals on the risk-return basis. Business strategy determines the weights that are to be given to each factor for computing the index.

· Total Economic Impact (TEI)
Total economic impact is a method developed by Forrester quantifying risks and providing for flexibility in business environment. TEI takes into account the changes to the potential costs that might incur later on in the product life cycle. The risk for the change in costs is more during the development stage of the product. This might go down during the later stages. It also takes into account the costs and benefits incurred on the non-IT areas of the project. The development of the new product might call for new talents or skills from the people. This might result in a negative growth in the initial stages of development until they become adept to the changes. Computation of this index takes into account the benefits that a current capital investment can have on the product. Thus flexibility of functions or skills are converted into monetary value for analyzing the business value.

VAL IT is a tool that exists throughout the life cycle of an investment. It includes three processes, namely, value governance, portfolio management and investment management with forty one management practices to be followed. The investments are divided into portfolio of investments and the detailed procedure of performing the activities are analysed. This method monitors the performance of the processes throughout the economic life cycle of the product so as to define the deviations and assign accountability. Thus a continuous monitoring system improves the performance, leading to better results.

· Applied Information Economics (AIE)
AIE uses the various existing methods like operations research, portfolio management, game theory, acturial science, economics and other areas for evaluating the business value. Like other methodologies, this method conducts a cost-benefit analysis to aid in strategic planning. The disadvantages are less as this tool utilizes existing areas of science.

Whichever method s used, it must be communicated among the various members of the organization to ensure uniformity in practice and decisions.

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