Business is predicated on providing value to the customer, but it does not end there. The business itself needs to see value in the work, so this is really a value chain that is only as strong as the weakest link. If the value to the customer is too low or not existing, no customers will purchase the product. If the value to the business from the product is too low, there will be no investment
What is value
Value is the difference between the utility received and the cost for things.
Value = Utility – Cost
Value = Benefit – Cost
The utility may be customer dependent, but this must be understood, as this will drive the subsequent work. Not knowing what the customer values, clouds how we approach the work. We will write more about the conundrum later. It suffices to say no value to the customer means no value to the business, and therefore no work or project.
Traditional Organization’s Value Calculations
The organization calculation for value may be a little easier to discern. This is essentially the business case for the work and can be the following:
- Internal Rate of Return (IRR)
- Return On Investment (ROI)
- Payback Period
To determine this value proposition, we will need to have the cost estimates as this is the “cost” balance against the potential income.
In conventional projects, the prediction or estimates for the work happens early and happens on a large scale, specifically, there is an attempt to understand the potential total cost for the project, knowing these will be adapted over time and that the earlier predicted estimates will be much further from the actual than the end result and that over time learning and reviewing work results the estimates become closer to knowable or more certain, sort of like a GPS system work for ETA calculations.
The agile approach may still reserve a block of funds for the entire project, but the withdraw from this bucket of funds is based upon the specific expenditures for that set of work. Rather than the sum of the project work equals the sum of the project budget, we will build prioritized increments. This is important because as you will note below from a study of software projects from Jim Johnson[i], less than ½ of the features delivered via a project are used, that means we have done work (expenditure and time) with no perceived value by the customer. This effort burdens the entire cost of the product as the organization attempts to recoup the investment for the entire project.
Value and Learning
Rather than attempt to build out each of the features, there is a focus on the prioritized features, until:
- the most beneficial feature is completed sufficiently to present to the customer
- the product is sufficiently complete to experiments with and generate more detailed requirements
- the product is deemed to not be viable and the feature development is discontinued
This is somewhat true for conventional projects regarding ideology, there is no doctrine that suggests delivery large increments of feature content in each software iteration. However, in practice this hyper focus on one of the features or short bursts of work is much more diffuse in conventional project management practice. This is not conventional project management doctrine but how things are generally enacted.
So, we see that that this small increment and iterative approach may be great for providing quick value or at least opportunities for exploring the value with the customer via increments, but there is still a need for the organization to understand how this project, upon conclusion, will impact the bottom line of the organization and this falls more to the business case assessment methods previously noted.
Value at the Micro and the Macro Level
Just as focusing solely on the top level monetary or value proposition comes at a cost through the conventional business approach, so too does a sole focus in the immediate value and cost via an agile approach. A focus solely on the minutiae will often come at the expense of understanding the sum of these details and how that impacts the companies bottom line an potential profit or value extracted from the proposed project over the course of the project life cycle. A focus on one or the other comes at some detriment. This can be especially complicated as the product development includes more than just development personnel, but may include marketing and sales personnel, and manufacturing and post manufacturing support organizations from the company that are part of the organizations value chain. We will write more on the value stream mapping later.
[i] Johnson, Jim. 2001 Keynote speech XP 2002, Sardinia Italy