Understanding Value

Value, value, value. Everyone talks about it, and there is no shortage of opinions about what it is – but it's hard to nail down and reach broad agreement on what people actually mean when they say it. Many seem afraid of attempting to measure or estimate the value of the opportunities that an organisation might pursue via various strategies and initiatives and projects. While of course many will focus on "delighting the customer", or perhaps operational efficiency, at some point (eventually), the actions we invest our scarce resources in should help the organisation to sustain itself and possibly even grow.

Given the scarcity, there's just no getting round the fundamental problem that all organisations face. We can't have it all, and at the very least, we need to decide where to start. Perhaps more importantly, how do we decide when to stop and move on to something else with more value? In order to assess opportunities and make difficult trade-off and priority decisions about where to focus our scarce resources, we really need to be able to compare opportunities on a like-for-like basis. We could attempt to convert everything into bananas, but given that most of the cost side of the equation is measured in money, perhaps that might provide a useful means of comparison?

To make this easier, I've been developing and testing a simple framework for assessing the economic impact of the investment decisions we are making. It consists of four benefit types (or buckets) that an idea, feature or requirement might contribute to one or more of. Because we want to be able to compare between opportunities, they are necessarily focused on the  likely impact to revenue and costs...

Value Framework – Four buckets of value

Increase Revenue

This is the revenue associated with either increasing sales to existing customers or gaining new customers. This may involve increasing share of wallet, market share or even the size of the market itself. This could be by making changes that add value to existing products or services that customers are willing to pay for, or new products or services that either existing or new customers are willing to pay for. The changes you develop here are likely to be "delighting" features for either current customers, or new ones. This is also where "disruptive innovation"[15] occurs, enabling new business models and increasing the size of the market by serving new markets and undercutting others.

Protect Revenue

This is the revenue that is currently being received from existing customers who are paying for the products and services you already sell. Sustaining (and building a moat around) this revenue often requires ongoing improvements to at least keep up with competitors and maintain existing market share. The actions taken here are more defensive in nature, making processes faster and easier to use and removing any pain that might drive them to consider switching to a competing product or service. The changes made here are usually not considered valuable enough for existing customers to pay extra though. This is the basic maintenance of existing products and services that could be described as "sustaining innovations"[16].

Reduce Costs

These are where all those ideas about how to be more efficient contribute. The changes that add to this bucket will reduce the costs that we are currently incurring. Typical examples of this could be changes that speed up or automate processes, reducing the number of people required. It could also result in savings in overheads, equipment or other costs.

Avoid Costs

These are costs we are not currently incurring but there is some likelihood that we will in the future, unless some action is taken. Some examples of these might be the need to hire additional people to handle a new process, fines we may have to pay, or loss of reputation that impacts goodwill or brand value. This category would typically include a lot of things that many organisations might consider to be operational or strategic risks – often with an estimate of the probability of an event occurring.

Shouldn't we focus on customer delight rather than economics?

This is seemingly one of the paradoxes of Product Development that many struggle with. We know we should be focusing on the customer but we also need to keep in mind the economic tradeoffs we have to make in product development. Ultimately, insufficient profit makes it very difficult to sustain any sort of focus on the customer.

However, the risk of too much focus on the economics is relatively small and one could argue that it has been largely ignored for far too long. How can we possibly attract new revenue or protect existing revenue if we aren't searching for opportunities to delight the customer? The biggest risks organisations suffer from is where we find opportunities to reduce costs that may ultimately impact the customer experience. This is particularly problematic for service organisations, where a more efficient operation often translates to an increase in Failure Demand and unhappy customers. B2B organisations have it hard too as it can be difficult to identify who the real customer is, and end-users tend to get a poor experience as they are orthogonal to the economic value-stream. At the very least, I'd encourage you to give it a go.

In the absence of information about Value, of course the system optimises for other things. Why should this surprise anyone?

— Joshua J. Arnold (@joshuajames) January 5, 2014

Here are some tips on working out the economic benefits for your feature, project or initiative.