A new model for Intelligence ROI — (I-ROI)

 

Introduction

Many articles were published about the ROI of an investment in Intelligence projects. I can name at least 3 important articles about the subject handed to me by my friend Trip Krant. All of them and a lot of others try to format a model to measure ROI on Intelligence projects.

Why do we need to invest in Intelligence projects? The primary key-word is Risk. In a Risk-free world, (not that it exists anywhere), the survival of a good organization is almost guaranteed. We know today what would be the outcome of tomorrow, and the level of certainty is high. Decision making and planning becomes much easier.

However, the world is very risky, and every decision, planning, and strategy decided on by an organization must consider and embed the Risk factor.

In this article, I intend to suggest another model of evaluating the value of Information, derived from investing in Intelligence projects.

The Operative Intelligence Gap (OIP)

To begin with, I’d like to describe a Risk-free market which acts in a simple linear manner. Across time, and every Time-Unit we can define, as one day or other time range, the information about the market is known and easily gathered. Information is accumulated by time, and every Time-Unit (TU) gets another Information-Unit (IU).

The next graph shows demonstrate this

Since the market is risky and competitive, we would like to reduce risk as much as we can and gain enough leverage to outcompete our competitors. That is the motivation for investing in Intelligence projects. We would like to know more than our competitors at a certain time.

By investing in Intelligence projects, we get more relevant information and leverage. This gap between Risk-free information and Risky-market information represents the output of Intelligence gathering, and I call it Operative Intelligence (OI).

As for now, and we are still in the quantitative measures, I explained the Gain. But what is the Cost? We must define a quantitative measure unit to stand in front of the OI unit. It is the Risk of the market which our organization operates in. Market-Risk can de be defined in many ways, and I chose to look it up in the Stock Market Index.

I claim that we should look at the graph of the Stock Market Index over time, identify the past fluctuations and learn from market analysts about the expected fluctuations. Then, with the help of an analyst, normalize the past and future fluctuations and form a quantitative measure unit as Market-Risk-Unit.

To sum up the quantitative stage, the next equilibrium must occur to justify an investment in Intelligence projects in a risky and competitive market. We need to make sure that the Total Operative Intelligence Units gained up to Time-Unit X, is equal and/or exceeds the Total Market Risk Units affiliated to that time. Hence, TOI > TMR

In our simple model here, we have to make sure that for the prospect of T=3, the 6 extra IU gained by Intelligence investments, must be much more than the number of MR unites affiliated to that period.

Calculating I-ROI

Despite the simplicity of comparing Information Units to Market Risk Units, it is rather naive to do so. The real ROI is monetary and not physically, moreover the market value of one UI does not equal one MR Unit.

There are some preliminary assumptions to be taken at the beginning of this part of the model. First, we stay with the belief that measures are linear in the market. Second, we know now that there is Risk in the market, derived from the Stock Market Index.

As time passes, the Market-Risk rises, therefore, the worth of Information today loses its value from Time-Unit to another until it loses its entire value. The risk rate can act as a depreciation coefficient.

For this model let us assume that the value of IU today is 1 ($ or any other monetary measure), and the Risk-Depreciation-Rate of this specific market (R) equal to 5%.

The equation for calculating the value of IU (VIU) is VIU = 1 — Rt

The next graph shows that IU today loses its entire value in 20 TU.

But, in the case of Information evaluation, there is a little exception whereas a piece of information today may not be of any value, although it can complete the picture in a future TU. For that reason, we should add another subjective variable (Q) to the present value of IU so that the new equation can be VIU + QIU > 1

The Q factor is usually a subjective value derived from the managers’ perception and experience. It depends on the stability of the market. If we operate in a stable and known market Q is expected low. On the other hand, if we operate in a dynamic and growing market, Q is expected to be higher.

The next graph shows that in our model we operate in a dynamic and growing market and the subjective Q equals 15%. It is clear that by the end of TU 23, The SVIU loses its entire value.

To sum up this part of the model, we understand that information today (IU) worth 1, and by the end of 23 TU, it doesn’t worth anything. The Total Value of UI equals (SVIU * Tt) / 2, where Tt is the max TU with any value to the IU. In our case, Tt=23 and TSIU=172.5

In order to justify an investment in Intelligence projects, we have to make sure that the Total value of information until the end of TU23 equals or exceeds the Total Cost of the information gathering process at the same time range. Hence, TVIU>TC

Measuring the present value of IU

In this model, I decided that for simplicity it would be logical enough to normalize VIU to 1 and calculate all other measures based on it. But, the reality is much more complicated and subjective, and the fact is that most of the value of information is decided by the manager who invested in the Intell project. This reflects the perceived value of the new information gained, and how much the manager is willing to pay for it. That is, how much will he pay to reduce the risk today and up to the end of the TU when UI loses its entire value (Tt).

But it can not be based only on subjective attributes. We can think of an algorithm that can support the subjective value in calculating the present VIU.

Let us assume that our organization operates in a risky market with a Risk rate of 5% (R=0.05). In this market, there is a probability Pr that the Risk will occur. In this case, if the Risk occurs from present to Tt, the organization has a loss of -Pr*Rt (Rt stands for Risk from TU1 to Tt).

Now it is clear that the present value of information is based on the subjective value given by the manager (A), added to the potential damage which might happen if Risk occurs. Hence, VIU > A + Pr * Rt

A strategic approach to I-ROI

In this article, I tried to build a logical model of calculating ROI on investment in Intelligence projects. Many models are out there and maybe they are all right or wrong. My suggestion is based on logic and much experience in managing Intelligence projects. This model suggested a method of calculating I-ROI based on quantitative measures alongside, a method of calculating I-ROI based on monetary measures and risk.

The Intelligence work-plan in the organization is the source of allocating Intelligence projects budget. The work-plan is based on the strategic plan of the organization for the upcoming year or more and on the status of its accomplishment. The managers, then, recognize and define the information gaps preventing the plan to get fully accomplished.

Then, they decide on priority to the gaps by importance and relevancy, and after that, they decide on the budget-allocation including the Intelligence budget.

Given an Intelligence budget, it is time to calculate The Intelligence Core (TIC), as explained in my other article about the model of Intelligence process (see https://www.linkedin.com/pulse/new-model-intelligence-process-company-amir-el/).

The upper management must know the following measures: A, Rt, Tt, R, and Pr, if they want to calculate accurately the value of Intelligence in their market, and the expected I-ROI for investing in Intelligence for the time range of Tt, until the information of today loses its entire value.

(Always at your service https://www.webintelligency.co.il/)