We often talk of ‘value' but what exactly is it?
Here are a couple of real life ‘value’ events.
A couple on holiday were pleased with the Arabic silver tea set that they had just bought for ‘only’ 500 Dinars—until they found out that they could have bought it for 200 Dinars.
A car enthusiast was quite willing to pay triple the monthly lease costs of his peers, in order to drive a Lamborghini.
“Value” is separate from cost and is more than money.
Value is not just a financial attribute. Value exists in the eye of the beholder.
It is not an 'absolute' - rather it's relative to what is valued by the individual (or organisation). Value is bestowed by what an individual perceives as valuable—and this perception can change on the provision of more information.
In our two examples above, the initial perceived value of the silver tea set was destroyed by the knowledge of the availability of a much lower price ; in the other example, the far higher lease cost was outweighed by the perceived value of ownership and the pleasure of driving a Lamborghini. However, to many car drivers, paying extra to own a Lamborghini would be not seen as value, instead they would rather invest in and get value from other things.
When does value exist?
If you have a precious antique propping up a door—its value is defined by its use as a door prop ... until ... its antique value is discovered. Until then this antique value essentially does not exist.
But what happens when you don’t realize the full value? What value exists then?
Imagine you submit your lottery ticket to see if you’ve won and the person checking your ticket says that you’ve won $100,000. Great! But what if - you’ve actually won $500,000 but you’re not told this. You would therefore accept the $100,000, thinking this was good, when you’ve actually been savagely short-changed.
So when taking about value, you need to go beyond the superficial cost/return measures to determine if you are really getting value.
How does this relate to project investments?
If you costs are twice what you need to spend on a project, this may only become a concern should you ever learn that you’ve over-paid. Otherwise, ignorance can be (expensive) bliss.
Two utilities were installing in the same software system simultaneously—one spent over $82 million to generate average returns and results; the second spent less than $10 million and was moved into the top percentile worldwide for customer service and delivery performance because of how the system enabled processes and information.
Do you think the first utility would have preferred to spend $70 million less and get a better outcomes if they had known this was an option?
On the credit side of the ledger, if you are willing to accept half or less of what you could receive or generate from the same level of investment – again ignorance can be (expensive) bliss.
A major retailer was upgrading all of its software platforms. The identified benefits for the project were $35 million which was enough to get it approved.
The actual benefits available (but not identified in the business case) were worth over $100 million.
Sadly, for the owners who were selling the retailer, the purchasers realized much of the additional $60 million in benefits in their first few months after acquisition. The new owners effectively received a $60 million discount on their purchase price. The original owners accepted the sale price not knowing the total value they were selling.
Currently executives are told the expected cost and value (benefits) of their project investments. These costs and benefits may be checked for ‘financial integrity’ but are usually essentially accepted as presented.
If the project subsequently comes in ‘on budget’ and delivers the projected benefits—this can be considered “success”. But is it? You will only know whether or not you have been really successful if…
All of the benefits are identified—currently at least 25% of the available benefits can be left ‘on the table’ unidentified—that’s a quarter of the available value missed at the outset.
The cost and benefit bases are independently validated—so under/over statements of costs and benefits can be identified and corrected.
The end-to-end value delivery processes are optimized—so you received all of the available value at the least practical cost.
Any changes to the bases and assumptions of the cost and benefit calculations are captured and assessed so appropriate action is taken to maximize the net value realized.
These four steps will identify
Over priced project proposals (like the tea set)
Understated benefits (like the lottery win and retailer system)
Changes to the net value available (which could cause the project to alternatively be accelerated or cancelled).
‘Value’ is not well understood and, therefore, it is not well managed.
Value is what you value and it comes with costs—establishment, ongoing operating and maintenance costs.
While costs are usually defined to the cent, value can be ambiguous, incomplete, un-measurable and, at times, invalid. In most business cases, value is more often ‘assumed’ than clearly and specifically defined. It is hoped that the quantification of the financial benefits delivers the required level of value specificity—but this is only one element of a project investment’s value. When the value side of the ledger is under-defined it makes assessing and then measuring the delivery of the ‘value’ difficult to impossible.
To improve Value delivered
You need to define your desired bbusiness outcomes - what are you trying to achieve and what does it looklike when its all working just right.
Then identify all of the available benefits for each outcome, in terms of customer, competitive, capability, productivity, risk-reduction and financial benefits.
Then, quantify the financial benefits to compute their financial value.
Finally, the whole project and its business case needs to be thoroughly validated to ensure all of the benefits have been identified and all of the value is realistic and can be delivered.
This defines the Value Equation for your project. Only then do you know if your project’s value equation is valid and captures the true value. This clarity and specificity also sets you up for benefits delivery and measurement.
So how do you manage ‘value’?
Value needs to be
- Looked for (unidentified value effectively does not exist—think antique door prop)
- Made visible and therefore measurable (if you can’t measure it you won’t know if you’ve realized it)
- Optimized so as to eliminate any waste (can you deliver over 90% of the available value for, say, less than 60% of the original cost?)
- Targeted and planned for to ensure realization (70%-to-80% of benefits have to be planned for to be actively realized; they don’t just happen)
- Tracked consistently to assess any changes to the net value (the net impacts of any cost increases or benefits decreases need to be assessed and managed to ensure the project remains viable as an investment)
- Managed and measured so you know when the expected value has been realized (benefits/value should be delivered during, at the end of, and after the end of the project)
- ‘Banked’ and rewarded (to promote and reward a value delivery culture).
When have you received the “value”?
To obtain a net financial benefit, the total value gained needs to exceed the total costs of delivery and operation.
To obtain a non-financial benefit—eg continued compliance or the removal of a competitive disadvantage—whether or not the costs of delivery and operation are seen to exceed the value derived is a ‘value judgment’. However, this judgment is not based on personal preferences but on the measured realization of clear, specific, agreed business end state outcomes.
Where do you start?
Every organization needs to start by making a decision in answer to the question;
“Are you interested in optimizing the net returns and value (of all types) from your project investments?”
If your answer is, “No,” then that’s fine; you can just continue on as you are, trusting you are not overspending and under-delivering.
But if your answer is, “Yes,” then you need to take action as it will not ‘just happen as if by magic’.
Cost management is usually already closely managed, tracked and measured in detail. So to improve your net value delivered you will need to focus on the value side of the ledger.
Increasing value is simple once you know what to do
You need to ensure you:
Identify ALL of the available financial and non-financial value available.Surprisingly rarely is “all of the available value” identified, as current processes are not designed to maximize and then optimize the value but to minimize it. This is where you need to adopt the TOP Value Equation™.
Validate the availability of all of the value claimed.Managers are naturally reluctant to maximize the value they commit to deliver as there are too many unknowns and the past delivery performance of projects does not inspire confidence. Therefore, you need an independent process to thoroughly validate each project to ensure that it has identified both all of the value and all of the costs of delivering this value. Here you can use the TOP Validation program.
Optimize the portfolio.Most prioritization processes are poor. They allow ‘gaming’ and are politicized by executives to get what they want. These problems can only be overcome with the support of the CEO or other powerful executive. An effective prioritization process will ensure that only the projects you should be focusing on are approved. This can be easily achieved by implementing the TOP Prioritization process.
Clarify accountabilities for value definition, tracking and delivery.Accountability for cost is usually clear—the project manager. Accountability for value is less clear. Indeed, few governance teams appreciate that their primary role is to fully realize the value available from their project investments. Here you need to implement TOP’s effective value-focused Governance process.
Increase the number and value of benefits planned for and actively realized.It is often assumed that when you build the project that the benefits will automatically come. Not true. Delivery of a project by itself will only deliver around 20%-to-30% of the available benefits. The other 70%-to-80% of the available benefits have to actively realized. This requires the simple but effective TOP Benefits Delivery Planning and Management process.
Build your capability to consistently deliver the optimum business value from your project investments.Achieving your desired results—your desired business outcomes, benefits and value—once is good but not sufficient. You need to build your organization’s capability to deliver the optimum value from every project/program investment every time. To do this you need to identify the gaps in your organization’s “value delivery capability”—gaps in your processes, policies, performance measures, etc—as these determine the value of the results you ‘bank’. To deliver the optimum value from all of your project investments you need to uplift your organization’s “value delivery capability” to the level where you can confidently start any project knowing that you will ‘bank’ the full value. All of TOP’s products are designed to immediately uplift your value delivery capability.
Your starting point should be the introduction of the Value Equation as this defines the “value” to be delivered.
It really is that simple.
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