from new software solutions. The previous year’s revenue totaled $1.29 billion. Its real variable costs (RVCs) were
$210 million ( 16.3% of revenue). The resulting throughput (all revenues minus
RVC) was $1.08 billion. The company’s
fixed costs totaled $910 million, hence
its earnings before interest, tax, depreciation, and amortization, or EBITDA,
the previous year was $170 million (see
Now suppose the company can consistently achieve annual revenues of
$1.29 billion. If we use a conservative
EBITDA multiplier of 10, the company’s market value is $1.70 billion.
Suppose the IT division succeeds
in implementing the kind of improvement practices described here, thereby increasing the amount of software
solutions delivery by 20%. Suppose,
too, that the value-creation potential
of these additional 20% software solutions is on average only 25% compared to average projects in the current realization portfolio. Since only
30% of the revenue originates from
the introduction of new software solutions, the additional revenue for the
following year would be $1.29 billion
multiplied by 30% multiplied by 20%
multiplied by 25% = $19 million. RVC
will probably increase proportionally
to $213 million, or still approximately
16% of revenues.
If the IT division achieves this increase in productivity of software solutions with the same resources, and
does it without adding human resources or assets to the company, then fixed
costs are unchanged. Our own calculation shows the corporate EBITDA
would grow to $186 million, a 9.4%
increase over the previous year (see
Table 3). Using the same EBITDA multiplier of 10, the market value of the
company reaches $1.86 billion without
adding significant resources or other
investment. Our experience shows
that implementing the strategic-gating
mechanism adds even more value to
the company overall.
These improvement steps require
a change in an organization’s over-
all culture, thus the leadership of the
CEO, CIO, and top management team.
The strategic-gating mechanism and
IT division’s internal improvement
activities are synergic and must be im-
plemented concurrently. If the busi-
ness divisions have doubts regarding
the IT division’s commitment to in-
troduce required improvements, they
would be reluctant to participate in
the strategic-gating selection mecha-
nism or submit project requests in the
form of complete kits. Likewise, if IT
management does not define requests
according to the complete-kit concept
free of over-requirements, it will have
little motivation to improve its own
processes. The culture of splitting
large software solutions into “stages”
or “releases” can be introduced at a
second stage, once the other improve-
ment steps are in place.
This approach to reducing the software
value gap complements conventional
approaches outlined here through a
high degree of synergy. Its ability to
add value has proved to be achievable
without further investment. Improvement is possible in several months.
Success along these lines is easier to
accomplish when the initiative for the
improvement project comes from the
CEO or the board of directors and the
CEO becomes the “owner” of the project. Reducing the software value gap
for enhanced value creation complements other value-creation activities
when other sectors of the organization
(such as marketing, sales, R&D, engineering, project management, and operations) pursue them.
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Shimeon Pass ( firstname.lastname@example.org) is a senior
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Boaz Ronen ( email@example.com) is the Professor Simon
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Copyright held by Author/Owner(s). Publication rights
licensed to ACM. $15.00
Table 2. Profit-and-loss summary.
Last year ($ millions)
Real variable costs 210 [ 16.3%]
Fixed costs 910 [ 70.5%]
Earnings before interest, tax,
depreciation, and amortization
170 [ 13.2%]
Table 3. Value creation, as seen in the profit-and-loss summary.
Revenues 1290 1309
Real Variable Costs 210 [ 16.3%] 213 [ 16.3%]
Throughput 1080 1096
Fixedcosts 910 [ 70.5%] 910 [ 69.5%]
EBITDA 170 [ 13.2%] 186 [ 14.2%]
∆(EBI TDA) [~∆Value] + 9.4%