Dear Quantum² Member...
For most of us, the budget cycle has just ended. This is the time of year when we may feel a bit frustrated about making the financial decision makers understand the value that our Information Resource Center brings to the organization. This month we discuss how to understand the relationship between our information services and our organization's operating margin.

Quantum² Community of Practice

Just a reminder that Dialog and SLA are partnering to offer the Quantum² Community of Practice dedicated to leadership development for information professionals. Quantum² members are invited to join to share ideas and best practices for topics such as defining the value of information services and gaining visibility with management. This community is available to all SLA members. Find out more about joining the Dialog Community of Practice.

Cost Justification: How Information Services Relate to Operating Margin

Effective cost justification needs to put money spent in context. Regardless of the cost of a product or service, the first question asked is "where is the money going to come from?" For any organization, the answer is usually "out of operating expenses". Putting costs in context requires the realization that the money an organization spends on services, such as the Information Resource Center (IRC), is not kept in a box. The organization must procure that money by selling products and services, billing and collecting money from customers. This money is called revenue.

To see how your request for additional IRC operating expenses (or budget) might impact your organization, let's consider the operating margin. The operating margin is the amount left over after operating expenses have been subtracted from revenue.

Let's assume that the operating margin at your organization is 10 percent. At that rate, your organization is spending $9 out of every $10 of sales revenue to meet basic expenses. For your organization to spend an additional $1 on the IRC and maintain that 10 percent operating margin, the sales force must make approximately $10 of new revenue. In other words, if the IRC costs $1 million a year, even a very profitable organization must sell approximately as much as $10 million of services just to be able to fund it.

Please note that an operating margin of 10 percent is very good and few companies achieve an operating margin that high. Using a more realistic operating margin of 5 percent, it takes $20 of new revenue (sales) to have $1 left over to add to the IRC's budget. So the lower the operating margin, the more revenue the organization needs.

You need to know your company's operating margin in order to understand the impact of the IRC's budget on it. To calculate operating margin, find your organization's Income Statement (also called Profit and Loss Statement or Statement of Operations). The top line will be revenue, or sales (or turnover in the U.K.). Then subtract everything up to and including operating expenses. The result is the operating income. Divide operating income by revenue to get the operating margin.

To really do the job right for your own IRC, determine how much of your organization's services and products it would take to generate the amount of revenue required to add $1 to the IRC's budget. For example, assuming that your organization has a 10 percent operating margin, the IRC has a $1 million budget, and the company sells software licenses at $1,000/each, it must sell 1,000 licenses to be able to fund the IRC.

As always, your suggestions for workshop topics are always welcome and encouraged. If you know a friend or colleague who would benefit from Quantum², please encourage them to sign up today.