understanding stakeholder value agile edge grant rule sms

Agile Edge – 1st October 2009

Understanding

stakeholder value

© Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 1

Agile Edge – 1 October 2009

SoftwareMeasurementServices

Your presenter


P. Grant Rule,

Managing Director, SMS

As a founder of the UK Rightshifting Network, with over 35 years

experience in the field of softsystems, I am committed to leading

firms in learning how to be more effective at creating value and

achieving desired outcomes for all stakeholders.

This talk is about

understanding &

sustaining

value…


• It’s about accounting for the total cost of acquisition & ownership

• Acquirers & producers are more effective when they align with stakeholders’ desired outcomes

• To do that, you must understand the stakeholders’ perspective and balance 5 kinds of value

• Outcome-Based Agreements achieve the necessary alignment, and foster partnership between customer and supplier

Why should you invest time & effort to understand value?

• A deep understanding of value helps you:

• Orient & travel toward your desired outcome

• Deliver, grow & sustain wealth creation


• Deliver, grow & sustain wealth creation

• Establish & maintain profitable relationships

with customers, suppliers & co-workers

• Increase focus on value-adding activities

• Reduce waste & unwanted impacts & costs

• Those who understand value create value

Effective organisations understand value… …and perform x4, x5 or more times ‘the norm’


The principles of lean systems thinking

• Value – understand what value means to the stakeholders

• Value stream – identify and align all the process steps that contribute value… eliminate those that add no value

• Flow – create conditions that enable value to flow


• Flow – create conditions that enable value to flow smoothly downstream, with no logjams or inventories

• Pull – enable the customer to pull value from the stream at the time and place and in the quantities desired

• Pursue perfection – continuously improve the production system to respond to the stakeholders’ demand for value

Ref: ‘The Machine that Changed the World’, James P Womack, Daniel T Jones & Daniel Roos, New York,1990

Whose value?Which stakeholders?

1

Engineers

Engineers

Rawmaterials

Know-how

Know-how


2

3

4

End Consumer

Engineers

Engineers

Engineers

Products& services

Financial investmentis combined with rawmaterials, information,human talent, know-how& effort, to manufacture products & services

Know-how

Know-how

Value is delivered to the end-consumer, and new know-how & IP is created for the business

Raw materials

New know-how,intellectual

property

The Business


Manufacturedproducts & services

End ConsumerInformation, human talent, know-how & effort

The Business& Workforce

While those who have invested in the business are seeking a return on their investment

Raw materials


property

Financial



Information, human talent, know-how & effort

Financialinvestment

Financialreturn

Investor

Work depends on effective social institutions & results can add or detract value from society

Raw materials


property

Financial Partners,




Financialinvestment

Financialreturn

Partnership,cooperation,

collaboration

Partners,Families,

Community

Society

The environment provides not only raw materials, but sustains the processes of life!

Raw materials


property

Financial Partners,

H2O, CO2/O2, N2, cyclesfuels, land, etc.




Financialinvestment

Financialreturn

Partnership,cooperation,

collaboration

Partners,Families,

Community

Consumed &recycled resources,

waste products

Humans derive value from five types of capital to sustain and improve the quality of our lives

Manufactured Capital


Natural Capital

SocialCapital

HumanCapital

Financial Capital

The Five Capitals model

• Financial Capital (‘treasure’ - a means of exchange):

– Finance has an important economic role as a means of exchange, but it has no

inherent value. It represents natural, human, social or manufactured capital (e.g. as

shares, bonds or banknotes) and facilitates trade.

• Manufactured Capital (‘the built environment’ – including softsystems):

– Products, fixed assets & infrastructure e.g. tools, machines, buildings, roads, etc.

• Human Capital (including intellectual property):


• Human Capital (including intellectual property):

– People's health, talent, education, know-how, guidebooks, instructions, skills,

creativity, motivations & morale… all of which contribute to productive work.

• Social Capital (the institutions of ‘civil society’ and community):

– Institutions that help people maintain & develop human capital in partnership e.g.

families, communities, businesses, trade unions, schools, voluntary organisations,

local and central government. Community spirit, team spirit, loyalty, culture.

• Natural Capital (renewable & non-renewable resources):

– Any stock or flow of energy or renewable and non-renewable resources; sinks that

absorb, neutralise or recycle wastes; natural processes & cycles that regulate the

environment, growth & decay, etc.

Good governance

implies management

of threats to value in

the form of…


• Capital assets

• Debts

• Flows

Each capital has matching debts and flows

Five Debts• Financial debt : represents labour

and/or tradeable assets

• Physical debt : aka technical debt –

incomplete or missing quality, defects

that will need correction

• Knowledge debt : aka ignorance – lack

Five Flows• Cash flow :

invoicing, accounts payable

• Trade : flow of made goods

• Knowledge flow : training, education,


• Knowledge debt : aka ignorance – lack

of know-how needed to achieve some

goal

• Social debt : unfair social conditions,

poor education, inadequate

healthcare, unemployment, inter-

community tension, disloyalty to family

& community, favours owed

• Environmental debt : pollution,

damage to the natural regulatory

cycles, disruptive change to habitats,

non-sustainable land use

• Knowledge flow : training, education,

communication, creation & loss of

intellectual property

• Community spirit : human interactions,

will to cooperate & collaborate,

exchange of favours

• Flow of natural resources : H2O,

CO2/O2, N2 cycles; growth & decay;

population dynamics; oil & gas cycle;

tectonic movement; evolution;

Debt results from a

delayed, uneven or

unrecognised trade

or compromise

Debts must be paid

eventually…by someone

Imposing debts on others is

unethical


• High risk for high interest rates

• Environmental damage for transport infrastructure

• Worker morale for short-term ROI

• Technical debt for speed of delivery

• Ignorance for cheap labour (outsourcing core competencies)

We all work in

extended value

streams


• Our stakeholders include the customers of our customers

• We need to co-evolve with our partners & adapt our value streams to meet customer demand (needs)

Maximum value is sustained when organisations align their activities to common goals

A

Engineers

Engineers

Rawmaterials

Know-how

Know-how


B

C

D

End Consumer

Engineers

Engineers

Engineers

Products& services

Each organisation formsone reach of the extended value stream, and isdependent on others

Know-how

Know-how

Leaders create alignment by agreeing a firm’s ‘True North’ direction

e.g. 2x speed – 2x margin – 2x market share

e.g.

accurate budgets – on-time delivery –effective standards – quantified capability

e.g.

double turnover & triple profit by EOY 2012


• A simple pungent phrase that expresses the critical success factors that characterise

the vision & desired outcome and helps create a sense of urgency

• An organisation’s ‘True North’ direction…

– Exerts a ‘pull’ toward which everyone in the organisation, whatever their rank or role, can align themselves and their activities

– Encompasses all stakeholders needs – value for customers, knowledge for staff

– Enables construction of a balanced scorecard

– Establishes way-marks as a basis for gauging process performance & success

– Ensures solutions are sustainable over time

Value is a measure of ‘cost effectiveness’ - the

relationship between a functional need and the cost to

meet that need or performance (service) level

• Value can be expressed as ‘performance / dollar’ (ie ‘bang per buck)’

• The Value Equation is:

• Value = (Functional) Performance / (Unit) Cost

• Value Engineering is the process applied to ensure the highest value by


• Value Engineering is the process applied to ensure the highest value by

delivering all required functions at the lowest overall cost

• Whenever we expend resources (pay a cost), we do so for a reason

• The function to be performed results in value to the stakeholders and represents the ‘reason’ that justifies the expenditure

• Function is the ‘benefit’ we buy when we expend resources (costs); it is the ‘effective’ in ‘cost effectiveness’

Value = Worth / Whole-life Costs

• Value

• The true value of a product or service is the relationship of its perceived worth to its whole-life costs

• Value = Worth / Cost


• Value = Worth / Cost

• When an item has a Value greater than 1.0, the item is perceived to be a fair or good value

• When an item has a Value less than 1.0, the item is perceived to be a poor or bad value

• When the perceived worth far exceeds the life-cycle cost, we usually consider purchasing the item


• Whole-life Costs

• The true cost includes not only the money paid to buy it. Much more is involved.

• When you buy something, you also purchase its long-term effects.

• The initial costs plus the long-term costs are called the whole-life costs.

This includes such things as:


This includes such things as:

• The time involved to define, design, develop and deliver the project

• The people needed (their number, skill and experience)

• The degree of difficulty involved

• The cost of making money and/or other resources available in a timely fashion

• The cost of maintenance needed (incl. preventative, corrective, and adaptive maintenance)

• The social costs, impacts on civil society and future generations

• The impact on human capability and future opportunities

• The impact on natural capital, particularly the depletion of non-renewable resources & the effect on environmental services

• Any impact on the built environment (one opportunity often restricts other options)


• Worth

• The worth of a product involves many features, including:

• Benefits received

• Services obtained

• Customer satisfaction with product performance (incl. quality) and/or service levels


• Customer satisfaction with product performance (incl. quality) and/or service levels

• Safety features

• Convenience

• Aesthetic values

• The worth of the product is a measure of the benefits obtained by the stakeholders

involved

• It is a measure of how well the end product meets the stakeholders’ essential needs

and the added desires of all those that have a voice in the product selection or its use

• An end product must always supply the essential need, or its worth will be poor

• In the context of the ‘five capitals’ economic model, to evaluate worth we need to

consider the impact on social capital, human capital (economic development, skills,

capabilities, etc), and both the built and natural environment

Determining the worth of a function

• “The worth of a function is the lowest price we must pay to reliably accomplish a given function.” Estimates depend on:

• The state of the art

• The thoroughness of the value engineering study

• The accuracy of the available information

• Worth (i.e. the lowest conceivable price) can be calculated or estimated:


• Worth (i.e. the lowest conceivable price) can be calculated or estimated:

• By judgement and experience – consider it to be your money that you are spending – what would you consider the item be worth to perform a given function.

• By analogy – searching for other existing products or services that would do the same function – and by observing or researching what limits have been reached by others.

• By ‘refinement’ – successively remove all features of the design to simplify the product or service to the minimum irreducible form. Then by relating the cost of the simplest possible option to the cost of the proposed design, it is feasible to determine whether or not there is room for value improvement.

• By comparison to existing standards – there no need ‘to redesign the wheel’. The trick being knowing where and how to access appropriate standards.

• By value factors – rated on an arbitrary scale from 1 to 10 (say). Position the function on the scale, suggest alternatives and estimate relative positions. Lower cost ideas are developed further.

• By establishing cost targets – e.g. to reduce cost by 30% – then working at the problem until the target is achieved.

• By value standards – develop standards for functions that recur frequently.

Value = Minimum Cost / Whole-life CostsValue : >1.0 good value --- <1.0 poor value

• Function worth

• The worth is defined to be ‘the minimum cost for which the desired outcome could be delivered’


• Whole-life (service) costs = (1 + 2 + 3 + 4) – 5

1. Cost of define, design, develop, deliver

2. Cost of support & maintenance

3. Cost of service management

4. Cost of impacts on ‘four capitals’

5. Savings (cost reductions) through whole-life

Key challenge for both customer and vendor

• “requirements cannot ever be stated fully in

advance, not even in principle, because the user

doesn't know them in advance -- not even in

principle”


• “the development process itself changes the user's

perceptions of what is possible, increases his or

her insights into the application’s environment, and

indeed often changes that environment itself”

‘Lifecycle Concept Considered Harmful’, Daniel McCracken & Michael Jackson,

ACM Software Engineering Notes, April 1982

Traditional contract management methods do not really address the customer & vendor needs

• They pretend requirements can be defined up-front

• This leads to:

• Hidden issues

• Unnecessary risks


• Unnecessary risks

• Expensive high ceremony change process

• Scope changes tricky to monitor & control

• Traditional contracts lead people to rely on detailed terms

• Individuals often interpret terms differently

• Emphasis on Service Level Agreements rather than on outcomes can

drive dysfunctional behaviour - confusing SLA (measures) with the goal

• The adversarial approach is not conducive to cooperation

Traditional ‘big design up front’ needs large investments, delays benefits & increases risk

Cumulative

value


Time

1st ReleaseBreakeven

Incremental delivery creates more value – not just money, but know-how, capability, morale

Cumulative

value


Time

1st Release1st IncrementBreakeven

Outcome-Based Agreements using an output-based pricing regime simplify matters

Size • The customer identifies a need

• A rough functional scope is estimated in function points

• An allowance is made for scope creep & change+20%

+30%Price Points £/cfp

Max in agreed time w/oundue compression


Ideal Actual

Baseline

Size in COSMICfunction points

InitialEstimate

.

ToleranceTolerance ReserveCapacity

creep & change

• The customer & vendor agree a price per function point

• The customer & vendor teams cooperate to refine requirements & deliver value incrementally

+10%

• Scope, change & progress is monitored throughout by an objective 3rd party Scope Manager

• Undue change & schedule compression is managed

The Basic OBA Method has four phases designed to enable work to start quickly

• OUTCOME: Identify the need, the business case and the business value with stakeholders• CONTEXT: Determine an outline architecture (i.e. N x sub-systems), context, purpose, etc.• SIZE: Assess the size range using Rule’s Relative Size Scale (S, M1, M2, L, XL, etc)• PROFILE: Quantify non-functional requirements / project type to assess impact on price/fp• PRICE: Determine an acceptable range for the unit-price, total price and duration

1.DemandPhase

• RFP: Issue a Request For Proposal (minimise risk using at least 2 vendors)


• RFP: Issue a Request For Proposal (minimise risk using at least 2 vendors) • EVALUATE: If the risk warrants

• Conduct capability evaluation of vendor (CMMI-DEV)• Conduct appraisal of customer acquisition practices (CMMI-ACQ)

• AGREE: Agree a simple, short contract• Expected scope = baseline + tolerance• Unit price regime for expected scope + price for late changes

2.Select &

Negotiate

Phase

• DESIGN: Cooperate to develop detailed product architecture; compile Product Backlog• PRIORITISE: Prioritise items in the Product Backlog; determine size of high-priority items• DELIVER: Iteratively develop and deliver value (using agile methods e.g. Scrum)

3.Value

Delivery

Phase

• REVIEW: Conduct a retrospective of results quarterly, half-yearly, annually• Frequency depends on risk, customer satisfaction, level of cooperation, etc.

4.ReviewPhase

Summary:

• Understand value if you want to deliver value

• Consider all 5 capitals – don’t rob Peter to


• Consider all 5 capitals – don’t rob Peter to pay Paul

• Avoid waste if you can; else reduce waste

• Align your activities with your True North

• Optimise the whole

Think holistically,

deliver

incrementally


• From concept to consumption

Questions?

??


??

.

SMS are specialists at

improving business

outcomes from software-

intensive systems


.

For further information, please contact: T: +44 1732 863 760E: [email protected]

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