Editorial: How to Monetize the Value of OR

Abstract

In his last months as editor in chief of this journal, the first author was seeking papers for this 40th anniversary issue of Interfaces. He wanted to generate a final issue with works from folks who were truly in the interface between academia and industry. In the first author’s opinion, few currently fit that bill better than the second author. When approached by the first author about a paper for this issue, the second author happily agreed. We then set about finding a topic that had not been broached. The first author has been consulting successfully for 20 years or so, but had never landed a project in which the client would agree to a percentage-of-savings fee. He had once come close with a Fortune 100 company. However, the client’s boss must have been scared off by the glee in the first author’s voice and never approved the deal. The second author has been able to accomplish percentageof-savings deals and has created a very successful company based on operations research (OR), while continuing to be a very productive professor. How has he been so successful in navigating the interface? That’s what the first author set out to learn and share with the readers of Interfaces. The most efficient approach for acquiring this information turned out to be an interview format. In what follows, the first author (JC) discusses, among other topics, monetizing the value created by OR with the second author (ST) in the hopes that we can all learn from the second author’s experiences. JC: OR methods, when applied appropriately, have created significant monetary and economic value. Most of the time, however, it appears that the OR person who played a role in this value creation does not get a proportional amount in compensation. In your OR Practice paper published earlier this year (Tardif et al. 2010), you discuss a project at Deere executed under a gain-sharing agreement. Can you give some details? ST: I agree with your general observation. The short answer to your question on the Deere project is that it was a 50-50 split based on the value created that can be attributed to this OR effort. In the paper, we show that the value created is clearly incremental over what Deere would have made (or was making from parallel projects, termed as “preexisting” initiatives) had we not done the engagement. Thus, we were paid about $5 million for this project over a period of 2 2 years. As you said, typically, even if an OR project saves $500 million and wins the Edelman competition (or is a competition finalist), the OR folks on that team most likely make less than $5 million. JC: Let’s take a step back. How did you get to this gain-sharing agreement? ST: This was not our first interaction with Deere. When we were crafting this arrangement during the fall of 2004, we had already done two very successful OR-based projects. One was an Edelman finalist in 2004 (Troyer et al. 2005); as a result of this project, Deere either eliminated or avoided over $1 billion of inventory. In the second project, we helped Deere save tens of millions of dollars by optimizing its product portfolio (Yunes et al. 2007).