Many corporations wrestle with the decision of which LMS
delivers the best business impact. Often
the decision comes down to price or ROI, but there is a more compelling method
of weighing the options and it's called EVE®.
.
LeveragePoint for Value Management is built using the
powerful Economic Value Estimation or EVE method. This method was developed by
Tom Nagle and John Hogan (both advisors to LeveragePoint) and introduced in
their book The Strategy and Tactics of Pricing. EVE is about a lot more than pricing
though. What it really does is to give people a rigorous way to think about the
value that an offering brings to a specific customer compared to a real
alternative.
Offer, Customer, Alternative – you have to consider all
three to understand real economic value.
- Offer:
the offer is the complete bundle of product and services and all of the
associated costs.
- Customer:
there is no such thing as generalized value, value is for a specific to the
user at a point in time, it changes from user to user and changes with economic
variable.
- Alternative:
Value is relative to alternatives, it can not be estimated in isolation. The
alternative may be to do nothing, or to continue to do what one is already
doing, but there are always alternatives and they always have their costs and
values. To really understand the value of an offer one needs to have identified
it and quantified it compared to the next best competitive alternative.
EVE is most often used by companies selling
business-to-business in order to understand how they are creating value for
their customers, how that value is dependent on economic variables, and how it
compares to their competitors (the alternatives). It is an important tool in
making product development and configuration decisions, but even more important
in communicating value to customers (customer conversations that are built
around value are usually more productive for both parties than those that turn
around cost).
There are other ways to use EVE. It is an effective way to
analyze and understand the value of different alternatives, and can be used by
buyers and analysts as well as vendors. Let’s look at an example. Given the
rapid consolidation of the enterprise software industry, buyers often have an
option of using a standalone “best-of-breed” solution or simply adopting the
equivalent module offered by their enterprise resource planning (ERP) software
vendor. Which approach offers better value? Let’s try a hypothetical EVE
analysis and see what factors could guide such a decision.
One area where there is brutal competition between the ERP
vendors and their independent competitors is the learning management system
(LMS) market. These are the software applications used to manage and deliver
learning across an organization. Well known vendors include Saba, SumTotal,
Plateau, NetDimensions and Giunti. Oracle and SAP both have LMS modules as part
of their portfolio.
As an EVE can only be done for a specific company, we have
created a simple example with some basic assumptions. Our imaginary company has
- Revenues
of $2,000,000,000
The next step is to
set the price of the competitive alternative. We will do this from two points
of view, to begin we will assume that we are the best-of-breed (standalone) vendor
and that we are competing with the ERP. Now ERP vendors will often throw in a
new module such as a learning management system at no additional charge! (We
will leave aside the question of whether this is a sustainable business
strategy.) So for the best-of-breed vendor the price of the competitive
alternative is $0.00. We need to decide on the unit price as well. Enterprise
software is often priced (for comparison purposes) in terms of users per month
and that is what we have used here. So if the ERP vendor is charging $0.00 per
month, what is the differentiated value of the best-of-breed vendor?
That will depend on the economic value of any differentiated
functionality the best-of-breed vendor offers above that of the ERP. Of course,
we will need to deduct from this the economic value of differentiated value
offered by the ERP vendor. So where to look for differentiated value? Based on
industry experience, one place to look is at integrating learning management
systems with content and other applications. Based on our own research we have
come up with a first set of possible value drivers around integration.
Positive Value Drivers for Best-of-Breed Learning Management
Systems
These are areas where the best-of-breed vendor has a
quantifiable cost advantage over the ERP.
Content
Integration
We assume a content budget of $1,200 per user per year and
an advantage to the best-of-breed LMS of 10% (a lower content budget would
decrease the advantage). This adds US$1.00 in value.
Third-Party
Systems Integration
We assume a $40,000 saving covering the integration of a
third-party talent management system (yes, we know that all LMS vendors have
state-of-the-art talent management functionality, but just in case). Assuming
this is amortized over three years this adds only US$0.33 in value.
The result is that one could justify paying US$1.33 for the
best-of-breed solution. But only if the ERP had no advantages, which is
unlikely.
Negative Value Drivers for Best-of-Breed Learning Management
Systems
ERP
Integration
Let’s assume that the ERP comes with this. We assume that
this costs $20,000 and again we amortize this over three years to give a
US$0.06 advantage to the ERP
IT
Hardware
As it will be easier to share hardware with other parts of
the ERP there should be some differentiation here as well. Not much perhaps,
let’s assume a 10% saving on IT hardware costs of US$0.50 per user per month,
or US$0.05.
IT
Maintenance
The same logic suggests that maintenance costs will be lower
with the ERP solution as there will be many shared tasks. Let’s be cautious and
say there is a 5% saving on costs of US$0.20 per month, for a saving of (hold
your breath) US$0.01 per user per month.
This looks like this in a standard EVE stairstep chart.
These are modest advantages for the best-of-breed Learning
Management System, modest but if the assumptions are true they are real and
they do justify paying more. The beauty of the EVE approach is that it makes
assumptions visible, and if someone disagrees we can substitute others and see
what happens to the economic value.
An important note, value is not price. One can not (or at
least should not) charge more than the value created. The price will be
somewhere between the reference value provided by the next best competitive
alternative and the ceiling set by the sum of the positive and negative value
drivers.
Let’s see what happens if a Best-of-Breed Learning
Management System has come up with a piece of functionality that impacts the
customer’s business and that there is no comparable functionality offered by
the ERP module. Suppose the LMS vendor has developed an integration with the
customer relationship management system (CRM) that delivers just-enough and
just-in-time learning in the context of sales conversations (we are not aware
of anyone that does this, this is an example only). Let’s say that this
increases sales effectiveness by only half of one percent.
Wow. If one could do this, then they generate important
value. In general, value drivers that impact revenues are much more powerful
than those that work on costs. The standalone LMS vendor can claim a differentiated value over the ERP vendor of US$9.54 per user per month, if the differentiated value driver holds up to scrutiny that is.
Now let’s flip this around and look at it with the
Best-of-Breed Learning Management System as the next best competitive
alternative and the ERP LMS module as the offer. We are only using the
integration value drivers here as they alone tell an interesting story.
Ouch. We hadn't designed the software for such a painful scenario. Will have to get to work on fixing that. What this says is that the ERP vendor should pay the
client to adopt its module rather than that of the standalone vendor!
The value of the EVE approach is that it shifts the
conversation from vague claims to precise statements about value. The
assumptions behind these statements are made explicit in the process of
quantifying value drivers, and these then can be questioned, and easily
changed. The conversation shifts from an antagonistic one around price to a
mutually rewarding one about value and how to maximize it. LeveragePoint for
Value Management is an easy way to create EVEs and use them across an
organization. One can quickly apply or remove value drivers and change
variables to test different scenarios and see what features support value
drivers that can be quantified to estimate real value.
Steven Forth, CEO
