The Return From Information (RFI)
Organisations sometimes use the wrong indicators to evaluate the benefits from information-related projects. As a result it is difficult or impossible to identify the most effective information-related investments. At best organisations tend to measure efficiency of processing information or the volume of information stored or manipulated. More storage and faster processing do not equate to effective use of information.
More storage and faster processing do not equate to effective use of information
There is a simple technique to directly measure how well an organisation uses available information – the Return From Information (RFI). Return From Information (RFI) takes into account the contribution of information technology, but also examines the actual use of information – to understand how information itself is used (including both computing and human aspects of information use).
How can this help you?
The large IT vendors and consulting organisations have a vested interest in large-scale technology-based investments – that’s where they make their biggest profits. So these companies encourage organisations to measure the return on investments – which typically focus on economies of scale and efficiency. But such traditional measures are useless for comparing alternative investment options, or deciding the optimum changes to make.
RFI makes it easy to identify and implement the high-visibility changes that are so important for excellent customer relations
Measuring the Return From Information (RFI) is the best way to demonstrate solid and tangible improvements in the way that information is managed and used. RFI is the perfect measure for identifying opportunities to improve the use of information, for comparing alternative investment opportunities, and to monitor improvements. RFI makes it easy to see where improvements are being made. It also shows which changes to organisational, political and behavioural factors will influence the use of information assets. Furthermore, the value of information becomes more precise and accurate as an organization gains experience in measuring its value.
By using measures for RFI, organisations have been able to focus on small changes that make a huge improvement in their use of information. Most of these changes have been achieved without the enormous expense and effort required by making changes with IT. Furthermore, RFI makes it easy to identify and implement the high-visibility changes that are so important for excellent customer relations.
New ways to measure the Return From Information (RFI)
Return From Information (RFI) evolved from an idea that I had in the early 1990s. I felt that organizations were using the wrong indicators to evaluate the benefits from information-related projects. Broadly speaking, most organizations were looking at their Return On Investment (ROI) in some shape or form. Typically these returns were calculated to determine whether the purchase or development of new hardware or software had been successful or not. If the cost of new technology was $100,000 then there had to be an equivalent or greater monetary saving in order to justify the purchase or prove that there was a decent return on the investment.
While this type of audit is often necessary at senior levels, and checking that investments are justified makes sound business sense, I didn’t feel that such measures were an appropriate way to demonstrate the impact of such investments to the organization. Return On Investment (ROI) shows that an organization isn’t wasting its funds – when it pays out, it gets something back. But investments in information technology and information management should be able to demonstrate solid and tangible improvements in the way that information is managed and used. As well as ROI, these type of investments need to show that there is an improvement on the Return From Information (RFI), in the same way that personnel might demonstrate higher customer satisfaction resulting from training provided to call centre staff.
Initially my idea was quite simple – it should be possible to identify the uses for any given chunk of information, and therefore it should be possible to give that information a value. Here’s a real life example. A financial institution offers a credit card, and to apply for the card an applicant has to fill in a form. The information on the form is a meaningful chunk of information in this context, and is used to vet the applicant and any related risks from providing credit. How valuable is that information? As with the valuation of antiques, it is difficult to come to an exact figure. The value of information becomes more precise and accurate as an organization gains experience in measuring its value. One way to think about the value of a chunk of information is to imagine what would happen if the organization had to continue functioning without having that information. Another way to ascribe value to rank a chunk of information on a scale from 1 to 10 – where 10 is the maximum value it could have. This approach may appear to lack rigour, but it is very easy to establish and surprising useful in practice.
Once you have a value for any chunk of information, it is relatively easy to assess whether this value has gone up, gone down, or remained the same as a result of a particular investment, project, or event. Let’s say that the financial institution gave a value of 6 to its credit card application information. It introduces new software to process the loan application – and then checks to see if the value of that information has increased or not. Maybe the value has gone down to 5 because participants think the information is not as easy to use. Or the value might go up because the information can be analysed in new ways.
Over the years I have introduced new ways to measure the Return From Information. Measuring RFI can be quick and rough, or more thorough but taking up more time and effort. RFI makes it easy to see where improvements are being made. When it comes to information-related investments, it is measuring improvements in the use of information itself is the best way to demonstrate that there is a solid Return On Investment (ROI).
How to measure the Return From Information (RFI)
Information is everywhere, and everyone uses information. Because it is so pervasive, it is often difficult to explain the benefits in “managing” information. It is a bit like saying that we need to manage the air that we breathe. Air can become polluted, and if you were a deep-sea diver or the pilot on a transatlantic jet it would be critical to manage air quality and availability.
It is the same with information – we can get by on poor quality information, and we are used to spending a lot of time tracking down information that we need (just try finding exactly what you need on the Internet). So it is really useful to have simple measures that can demonstrate the benefits of information management. One such measure is Return From Information (RFI). RFI is an indication of how well an organisation manages its investments in information. It helps to show what benefits ensue from high-quality information and effective information management.
RFI is an indicative measure – it is useful for indicating trends in the performance of a single organisation, or for comparing the performance of different organisations. The objective in using RFI is to get the highest possible return from information.
The simplest way to measure RFI is to divide profit by the value of an organisation’s information assets. Let me give you a few figures to illustrate how this works.
Let’s say a company has a pre-tax profit of $135 million and it values its information assets at $48 million. RFI is calculated as the profit figure, divided by the value of the information assets, expressed as a percentage. In this case it is 135 divided by 48, which works out at 281%.
I have obviously ignored a lot of other factors that affect the profits of an organisation. In using RFI you may need to take these into account. But for now I want to focus on the basic message that RFI provides. To illustrate this, let’s see what happens when we vary the figures.
If the company now develops the capability to store a lot more information, the value of the information asset might increase, to say $78 million. So there is a lot more information available. Although the residual value of the information asset has gone up, unless it the information is being used effectively it will not have a significant impact on the overall profit figure. Keeping a profit figure of $135 million, the RFI has now dropped to 173%. Investments in technology alone tend to increase the size and value of the information resource, without necessarily increasing the return.
Some writers, such as Paul Strassmann, believe that organisational, political and behavioural factors influence the use of information assets. In “The Squandered Computer” he argues that increasing the contribution of information technology to profit is a question of understanding an organisations use of computers rather than better understanding the technology itself. I would go further than this and say that it is primarily a question of understanding information itself.
If the company had a smaller information resource valued at $25 million, and still produced its profit figure of $135 million, then the RFI leaps up to 540%. There must be a corresponding increase in the effective use of information to gain a better RFI.
It is information management – the organisational, political and behavioural factors – that affect the return from information assets. The combination of creative information management practice supported by appropriate technology produces the maximum benefit.
Obviously there are many factors that will affect this ratio. Its value lies in the insights that you gain from using it. Three years is probably the minimum length of time needed to get a reliable picture of trends. RFI will then provide you with a good indication of whether you are getting the optimum return from your information resource.