SIDEBAR: Valuation Shifts
The turn of the century was filled with optimism for the impact of technology to disrupt industries and topple large vertically integrated companies. Fear of obsolescence drove many companies
to adopt technologies psychodemographic shift
that were occurred in
which Pragmatists became Visionaries and Conservatives
became Pragmatists. Technology acting as Visionaries attempted consideration of risks and costs of
purchasing occurred under the wrong to acquire productivity technologies operational deployment under a TCO
metrics. Pragmatists under ROI, without model. Conservative
asset-based companies lost the discipline of commodity procurement and bought a premium without consideration of how rapidly they would depreciate in value.
Today, in over-reaction to the bubble, the opposite has occurred typified by Silicon Valley’s shift from ROI to TCO. Innovators are building business cases. Visionaries are attempting to become Pragmatic, and judging change agent technologies not for their potential strategic impact but for their operational effectiveness. Pragmatists are purchasing proven commodities that provide plug and play benefits. Conservatives, well, aren’t purchasing much of anything.
Valuation metrics are a trade-off between complexity of determining which inputs are
simplicity for ease of
valuation metric isn’t the output, but the process of metric selection, assumptions, and the assessment of risk. Ideally this process occurs with the buyer and seller) to develop a shared understanding of risk and reward.
and comparison valuable aspect
study of inputs all stakeholders
and of a and (e.g.
Additionally, there is one major drawback to these valuation metrics: how they account for the
non-linear nature of technology deployment.
Technology investment and deployment is, by nature, non-linear
. NPV-based metrics such as
ROI and ROA assume a linear project state with little uncertainty in which there are no milestones that allow new decisions. In reality, investment can be incremental and milestones produce new information to assess risk and opportunity. Real Options Valuation (ROV) theory provides a mechanism to value alternative branches of a decision tree by valuing each decision as an option. However, the complexity of this approach and the financial acumen required has not yielded significant adoption. For the Late Majority, their asset-based business models and focus on the efficiencies of commoditization compels them to consider this approach. Alongside ROA, ROV provides a more complete picture of the risks and opportunities of a technology initiative over time.
At the company level, the Technology Valuation Lifecycle is a framework for determining the appropriate metric for a technology purchase or project for a given company based upon their
perception of technology risk. When estimating ROI, companies should consider the 5
estimating ROA, companies should Technology Valuation Lifecycle is also technology’s benefits in the economy.
consider the Competitive/Capacity a useful lens to view the larger shifts
Advantage. The in attitude towards