The TOP Value Equation

The TOP Value Equation How to increase business value while reducing costs, time and waste

Trademarks Copyright Performance Usage TOP s awards The TOP Value Equation TOP, Totally Optimized Projects, The 3+2 Capability Model, The Value Equation, The TOP Value Pyramid are trademarks of Totally Optimized Projects P/L Deep Smarts, Engineered Thinking are registered trademarks of Deep Smarts P/L. Publication Totally Optimized Projects, 2007-2013, All rights reserved. All of the examples and results presented in this book are real and have been achieved using TOP techniques. However, this in no way guarantees that the same or similar results will be achieved by others on other projects. TOP tools, techniques and processes have been successfully used on organizational restructuring, transformational change, IT/systems, construction and large-scale development projects, business start-up and merger and acquisition projects. However, the majority have been IT-related projects and so many of the examples are IT-oriented. This should not, however, limit your view or use of TOP. Gartner Market innovator and industry changer AIIA Outstanding Product Innovation The authors Jed Simms, the founder and creator of TOP has been Head of Strategy, An executive line manager, a Sponsor, Steering Committee member, Investment Committee member, Project and Program manager and performed many other project-related roles. Jed@totallyoptimizedprojects.com Alex Chapman, the co-founder and creator of TOP was one of the world s first globetrotting IT experts before leaving the industry to take an MBA and returning to help business direct, control and lead all projects, but especially IT projects, to success. Alex@totallyoptimizedprojects.com Totally Optimized Projects, 2007-2014 "2

The TOP Value Equation The TOP Value Equation enables you to align your projects to consistently deliver the optimal desired business outcomes, benefits and value for the least practical cost and in the least practical time. The TOP Value Equation fundamentally changes the project paradigm and increases the project portfolio s delivered value. It allows the measurement of project success to move from measures of efficiency (time and budget) to measures of delivered business effectiveness and performance improvement (delivered business outcomes, benefits and value). Totally Optimized Projects, 2007-2014 "3

The TOP Value Equation TOPICS Understanding the multi-dimensional nature of Value 5 The current cost focus (and its impacts) 6 The problem with the cost focus 7 Upside down thinking 8 The need for clarity of language 9 The TOP Value Equation 9 The components of the Value Equation 10 The impacts of the TOP Value Equation 15 Enabling Value Optimization 16 Summary 16 Totally Optimized Projects, 2007-2014 "4

The TOP Value Equation Understanding the multi-dimensional nature of Value Value is more than just dollars, pounds, or euros. It includes greater customer satisfaction and loyalty, enhanced capabilities, reduced risks, and improved productivity. Some of these benefits can be translated into financials but, unless they hit the bottom line, this translation is more of an exercise in value engineering than value management. When we are at accountant conferences and we want to illustrate the extensive nature of value, we often ask how many of those present personally own a car. Most hands go up. We then prove to them that using public transport, hire cars and taxis is much cheaper financially than owning a car by a factor of well over 100%. We lose money buying, running and selling a car. So, we don't buy cars for ROI reasons. The reason we purchase cars is that we value other factors convenience, availability, flexibility, prestige, and so on. Financial benefits are good, but non-financial benefits are also valuable. The key is to make sure that any value is tangible (which actually means measurable ) so that its realization can be planned, tracked and verified. Value is multi-dimensional, but it must be measurable. Everyone needs to recognize this. Caveat words and meanings With the flexibility of the English language we often find people using the same or similar words to mean quite different things. For example, some methodologies refer to desired business outcomes as general business objectives. In contrast, TOP uses the term to mean clear, carefully crafted and engineered statements of success. As such, it's necessary to get under the covers to discover the true meaning of words and phrases used to ensure that we are all talking the same language. To illustrate, we were recently talking to a PMBOK specialist who was stating that it was important to: Get the project outputs clear and agreed. Not business outcomes, but project outputs. Get the change management going in time. Not change management as the core driving force of the project, but as a later stream of activities. Ensure business involvement. Not full time business leadership, accountability and governance; just involvement. So beware of language that sounds the same as TOP s but is actually radically different. What you re likely to find is that the overriding emphasis in orthodox approaches (and these issues are often business-driven) is focused on the language of: Totally Optimized Projects, 2007-2014 "5

The TOP Value Equation Cost identifying and controlling the project s costs rather than the value. Control controlling the project to keep it on time and budget rather than directing it to deliver the desired business outcomes and strategy. Project only focused on what the project has to do and largely ignoring the broader business dimensions, activities and outcomes. Change as being driven by the rest of the project rather than being the project s driving force. In addition a focus on actual business value - its identification, maximization, optimization, protection, and delivery - is usually missing. So while your project delivery staff may honestly believe they are talking about and implementing business value, it will only be by exception if at all. The language and words may sound right, but the (lack of) results speak for themselves. The current cost focus (and its impacts) Projects are conventionally viewed, managed, and decisions made based on their cost implications. Reporting, auditing, and project management activities are geared around cost control. It is hoped that if you control the costs you ll control the value. This is not so. For example, a senior Project Sponsor made it clear that his project had to come in on time and on budget because his own credibility was on the line. The Project Manager complied by progressively (and surreptitiously) reducing the project s scope to keep within the time and budget. Three months from the scheduled completion date the project s output was found to be an unusable system that did not allow any of the project benefits to be realized. Focusing primarily on project efficiency and costs and not on business outcomes and value can be expensive. (This project was extended 6 months and cost 60% more than the original budget an ongoing cost burden the organization had to carry). Cost is seen as a primary measure of success together with time. Projects that are not delivered on time or on budget are deemed to have failed or be challenged. This focus on time and cost is driven by: The desire to set and enforce some measurable parameters The accountants who want to see financial control The fact that these are 2 easy-to-measure and very visible dimensions This is not to discount the value of cost control, but to refocus onto the delivery of the project investment s net value total benefits less cost of delivery and operation The existence of real expenditure constraints Totally Optimized Projects, 2007-2014 "6

The TOP Value Equation The project fraternity who see time and cost as parameters they can control The fact that, to date, few other objective measures have existed. Project delivery to time and budget are measures of project delivery efficiency. They are interesting, useful, and important but, at the end of the day, meaningless measures. They ignore the reason you do projects. You commission projects to realize the business benefits (TOP Self-Evident Truth #3). Measuring benefits and value is, therefore, both critical and fundamental to all project investments. The problem with the cost focus If we do projects to realize their benefits, it makes sense to focus on, plan, track, and measure these benefits and their value. But this is where we find significant holes and deficiencies in the orthodox approaches to project delivery. Most project delivery approaches have business cases that address the benefits to be expected from the project, but these benefits are often limited to the number of benefits required to offset the costs and get the project over the line. In addition, there is rarely a clear connection between the project and the benefits two significant value delivery failings Worse, the current cost focus encourages a series of behaviors that actually reduce the business value identified minimizing the benefits that the business agrees to deliver. This is obviously inconsistent with a value driven approach. What happens is that the project is defined, the workload is identified and the costs of delivery are computed. Now you have to find enough financial benefits to offset these costs. Since only financial benefits will offset financial costs, the primary focus is on identifying and quantifying financial benefits. The goal is to generate an acceptable return on investment (ROI) figure. So, once you ve identified enough benefits to generate an acceptable financial return, you tend to stop looking for benefits. This is just one way the business case process reduces business value. Then, suppose you are a business manager about to be held accountable for realizing future benefit and: You don t have control over the project; But you know projects don t always (often?) deliver what they set out to deliver; And you don t control the future or business/market environment; And you intuitively know things can change over time. Would you agree to deliver the maximum available benefits and value from the project? Of course not. Instead, what you are more likely to do is target just enough value to give you the required return on investment, and deliberately forego committing to any of the Totally Optimized Projects, 2007-2014 "7

The TOP Value Equation available benefits since you don t want to be held accountable for them in an uncertain world. 1 And it can get worse as the value gap the gap between what the project is to deliver and the potential business value can widen during the project. For example, currently most scope or issue decisions are made on the basis of their impacts on the project cost, time, and workload with little-to-no consideration of their business value impacts. As a result, decisions can be made during the project that may be good for the project (budget-wise) but may not be good for the business and its future operational costs and performance. TOP s removes these barriers to value delivery. The Value Equation equips you to manage the value gap (between the project and the business) and make decisions for the long term benefit of the organization. Upside down thinking In the orthodox approach, benefits essentially exist to offset the costs - but that s upside-down thinking. Let s go back to basics. 1. You do projects to realize the associated benefits to realize the gain for the pain. 2. Therefore the benefits are central to your projects and not just an offset for the costs. 3. After you re released from trying to find a cost offset, you can also take into account valuable non-financial benefits 2 identifying more gain for the pain. 4. Therefore you should start by identifying all of the available benefits maximizing the number and value of the benefits. 5. Then, and only then, should you identify the cost of delivering these outcomes and benefits. Using this approach the project s costs are identified as the cost of delivering the benefits (not the benefits existing to offset the costs a very different perspective). 6. If the costs are found to be too much, then you can look at optimizing the value, shedding some of the more expensive-to-deliver benefits. But this is only possible IF you know: a. The incremental cost of delivering each outcome and benefit. 1 2 There is an unsupported belief that any additional benefits will come anyway if the initial benefits are realized. Not so. 70+% of benefits have to be managed in order to be realized; not just hoped for. This deliver it and they will come belief is just unsupported faith Nb Tangible means measurable, not financial. Totally Optimized Projects, 2007-2014 "8

The TOP Value Equation b. The dependencies of each outcome and benefit so that you don t shed one outcome that is a pre-requisite for the realization of others you still want to realize. The TOP Value Equation enables this value optimization approach. For example, a major Cash Management Program in a bank was under cost pressure and as a result de-scoped one module that the subsequent value equation found to deliver 60% of the value. Oops It was quickly reinstated, but this is what can happen when you don t know where exactly the value is coming from. TOP aligns both costs and value so that they can be managed simultaneously to deliver the optimal net value. The need for clarity of language Before we go on let us clarify our terminology. To date we have largely referred to benefits and value as catchall words for the desired beneficial outcomes of project investments. This is a common but sloppy way of thinking. It is also a core reason why benefits management has been so poorly understood and managed. There are three elements to beneficial outcomes. They are all quite different from each other and need to be understood, defined, and measured differently: 1 Desired business outcomes 2 Business benefits 3 Benefits value. Failure to differentiate between these three value elements is a fundamental cause of poor benefits management and delivery. Each of the three elements has different characteristics, is delivered at different times, and has a different role to play in delivering value to the business. The relationship of these three elements is easily illustrated by the TOP Value Equation. The TOP Value Equation The TOP Value Equation shifts your primary focus from controlling your project s cost to optimizing your project investment s value. This change in focus, in turn, allows the whole delivery paradigm to swing around from a project cost to a business value focus with an immediate and significant increase in realized business value; which is, after all, the reason why you do projects. While it may not seem immediately obvious, the Value Equation changes the whole project delivery paradigm into to a value delivery paradigm. Totally Optimized Projects, 2007-2014 "9

" The TOP Value Equation The TOP Value Equation This illustration makes the relationship between the Value Equation elements easy to understand for everyday use: A O B V D (Project) Activities deliver outcomes. (O) Outcomes enable, support or deliver benefits. (B) (Some) benefits have a value. (V) This value is computed using the value drivers. (D) These value drivers can be tracked so that the up-to-date value can be known at any time. Importantly, every dimension in the Equation is measurable and trackable. The Equation links project activities (and their costs) to each business outcome and its benefits to quantify both the value and the cost of each outcome so that you can optimize your projects by eliminating high-cost/low-value outcomes. The components of the Value Equation Project change activities (A) are what has to be done to move you from your current state to your defined desired outcomes with their benefits. Most of these change activities will be actioned by the project team but some will be actioned by the business. These change activities can include changing the culture, systems, processes, structures, people dimensions, infrastructure, technology, or information flows. By identifying at the outset all of the change activities required to deliver each outcome, you ensure that: Totally Optimized Projects, 2007-2014 "10

The TOP Value Equation All of the changes required to realize the business outcomes, benefits, and value are known and can therefore be planned. Therefore the non-project team change workload is known and can be planned and allocated to the appropriate business parties to action (some of which can be actioned immediately for immediate benefits). Every project and business action can then be tracked back to the outcome and benefits it is enabling, supporting, or delivering. This keeps all of the project activities focused on the business outcomes so that you are automatically focusing on their linked benefits and value. Importantly, all activities become change activities whether they are business, project, or technical activities. When there is no longer a black box of technical activities, all activities can be planned, managed and measured the same way as change activities. Desired business outcomes (O) are the end states to be delivered in the business and working just right in businessas-usual. Outcomes are clear, specific, crafted definitions that define exactly the business-as-usual end state you are to deliver and how your success will be measured. They are the primary focal point of the project. With clear, specific outcome statements everyone knows exactly what they are trying to achieve and what their measures of success are. Absolute clarity and consistency in understanding the desired business outcomes solves many of today s projects problems (including reducing the time, effort, and cost consumed by rework). However, there are a number of rules that need to be observed if the outcomes statements are to be wholly effective. Importantly each outcome statement is defined to be measurable by a simple true/false test Have we or haven t we? Can we? Do we? Very simple black and white measures. You ve either delivered the outcome or not - simple. Example outcome We accurately invoice all service calls within 24 hours Measure: Do we or don t we? You either do or you don t; no confusion. Totally Optimized Projects, 2007-2014 "11

The TOP Value Equation Defining outcomes is a iterative process to get them exactly right. It is important that there is no ambiguity or confusion. Each word matters. Near enough is not good enough. Programs can have as many outcomes as their component projects define. Typically a project will have 6-16 outcomes to be achieved. Accurately defined outcomes are the holy grail of projects 3 around which everything else orientates. Business benefits (B) are the beneficial consequences of delivering the business outcomes. Each outcome delivers, enables, or supports one or more benefits. Therefore, each benefit is linked to the outcome that enables its delivery, so that when the outcome is delivered you know which benefits you can then realize. How you define your benefits is critical. Frequently, too many benefit statements are poorly and loosely defined and therefore unmeasurable (i.e. intangible). Each benefit statement must define what is being improved, how, how much, and how it is going to be delivered by the project (to prevent unrealizable benefits from being claimed). Each benefit must be measurable so that its achievement can be tracked and measured - albeit not always in financial terms. This may all sound obvious but is still not the norm. Whereas some benefits are automatically delivered by the delivery of an outcome, most require some additional change activities in order to be realized. These additional activities need to be identified, planned, managed, and measured to ensure each benefit s full delivery. And remember, benefits realization management is a consequence of the delivery of the project activities and outcomes and not some parallel activity. Example outcome We accurately invoice all service calls within 24 hours Measure: Do we or don t we? You either do or you don t; no confusion Associated benefits 20% reduction in working capital through the earlier issuance and collection of invoices. Elimination of invoice write-offs through the elimination of customer disputes caused by late invoices. Elimination of serviceman time resolving late invoice queries. 3 See the TOP book, In search of the Holy Grail for projects available from TotallyOptimizedProjects.com Totally Optimized Projects, 2007-2014 "12

The TOP Value Equation Notice that each of these benefits are measurable. Have we reduced working capital? Have we eliminated write-offs? Have we reduced serviceman time on this activity? We either have or we haven't. Benefit values (V) are the quantified measures of the benefits achievement often, but not necessarily, in financial terms. Benefits need to be separated from value since a benefit can be achieved (eg reduced working capital), but the projected amount (value) may not be delivered. You therefore need to measure benefits and value separately. The value quantification measures the level of value realized (including any over or under achievement). It is the scorecard, not the goal. Benefit values are linked to their enabling benefits so that their availability for realization can be tracked. (Notice these continuous linkages - outcomes - benefits - value; these are essential for value management.) These benefit values are quantified using the best value driver data available at the time of quantification. However, these value drivers (D) can legitimately change at any time and, therefore, need to be tracked throughout the project and beyond so that the current up-to-date value of any benefit is able to be quantified. In the service invoicing example the working capital benefit value drivers would include: Total value of invoices outstanding. Average number of days outstanding. Cost of capital, etc. If, for example, the total value of invoices outstanding is different at the time of benefit realization, then the financial value of this working capital benefit will be different, regardless of the project s performance. For example, if the total amount of invoices outstanding at the time of realization is half that originally projected, then the value of this benefit may be halved. This potential volatility in the value drivers means that the benefit s financial value is the least stable element in the Value Equation because it can legitimately change due to factors independent of the project. This in turn means that: 1. The financial value cannot be used as a proxy for benefits realization (sorry accountants). 2. Potential external changes to the value drivers need to be tracked to verify the benefits current value and the project s continuing viability. 3. The value available at the time of benefit delivery can be quite different from the value calculated as available at the time of the business case (but Totally Optimized Projects, 2007-2014 "13

The TOP Value Equation the reasons for any variance are now known and explained). So the everything s changed excuse for not measuring benefits is eliminated. 4. It is not meaningful to just take the business case financials out of future budgets without cognizance of their ability to legitimately change (up or down) due to external factors. Example outcome Associated benefits Quantified values We accurately invoice all service calls within 24 hours Measure: Do we or don t we? You either do or you don t; no confusion 20% reduction in working capital through the earlier issuance and collection of invoices. Elimination of invoice write-offs through the elimination of customer disputes caused by late invoices. Elimination of serviceman time resolving late invoice queries. Working capital reduction of $400,000. Written off invoice value reduction of $350,000 Value Drivers Value of outstanding invoices Cost of capital, etc. This example illustrates the importance of separately defining managing each project s outcomes, benefits, and value. NB The financial calculations need to be very detailed in order to be trackable and able to be quantified again at the time of each benefit s delivery. Value change - increase example A project to increase productivity in a call centre was justified (in part) on the basis of reducing the call centre headcount by five. But during the project the marketing department decided to increase the call centre s operating hours from 16 hours, 5 days a week, to 24/7. The call centre was therefore recruiting staff instead of shedding them. But, using the elements of the Value Equation, we were able to demonstrate that the project outcomes had been delivered and that the end headcount of the expanded call centre was 8 less than it would otherwise have been. No one actually left the building, but the savings were able to be measured as banked. Value change decrease example A major customer project planned for a customer new service adoption rate of 15% per annum. However, during the project the firm suffered massive adverse publicity and as a result lost many customers. Once implemented, the project achieved the 15% adoption rate, but the 15% was of a much smaller number of customers therefore Totally Optimized Projects, 2007-2014 "14

The TOP Value Equation realizing far less financial value. The reduced value was of course no fault of the project. The point of the above examples is that through the Value Equation the potential value of each benefit s value can be tracked from the day of its quantification to the day when the final benefit is realized. Any changes to the data values and assumptions, from either the project s activities or external events, can be captured and tracked to maintain a running record of the up-to-date value of each benefit. You re no longer mapping benefits realization values back to a value quantified months or even years ago, but to an up-to-date, realistic value quantification (which may be higher or lower than the original value). The Value Equation enables you to shift your primary focus from project control and costs on to business value realization. The Equation fundamentally changes the project paradigm so that now you can optimize your project s value rather than minimize it. The impacts of the TOP Value Equation The Value Equation drives the orthodox project-delivery processes in a new direction setting new measures of success, evaluating project proposals on new maximized and optimized business value bases, and refocusing project governance teams onto value delivery management. The Value Equation changes how you: Define your project goals now in the context of delivering clear, specific, measurable desired business outcomes and their associated benefits and value. Define your project outcomes as a subset of the agreed business outcomesbased ensuring the workload gap between the project and business outcomes realization is known upfront and managed. Focus your project now on the delivery of agreed project outcomes (and their associated benefits) and the subsequent realization of the business outcomes, benefits, and value. Think about your project now as a business change project to realize the business outcomes and benefits. Think about change now as the core driver of the project to deliver the outcomes, not just as a stream of activities late in the project to get the solution in. Manage your project now making decisions for the long-term benefit of the business rather than to protect the project s delivery efficiency measures. Measure your business benefits now measuring the delivery of benefits progressively both during and after the end of the project. Totally Optimized Projects, 2007-2014 "15

The TOP Value Equation Govern your project now with the Sponsor and Steering Committee clearly focused on defining, protecting, and delivering the available business value in full. But, most importantly, the Value Equation encapsulates the basic raison d etre for projects to deliver the business benefits and value. The TOP Value Equation, therefore, enables you to easily measure your project investments in terms of their delivery of the agreed outcomes, benefits, and value (effectiveness) and the resultant improvements in business performance (rather than just in terms of time and cost efficiency). Enabling Value Optimization Using orthodox benefits identification and quantification processes too many projects struggle to find even enough benefits to justify their costs. Therefore, the concept of benefits optimization has always seemed like a pipe dream. But now, the Equation enables you to Link the change activities (and therefore costs of delivery) to each outcome Link the benefits and their value to each outcome Link the outcomes into a dependency roadmap to show how they contribute to and are dependent on each other. These linkages allow you to optimize your project, protecting the value but reducing the costs of delivery by identifying high-cost/low-value outcomes that, If the high cost/low value outcome has no downstream dependencies, can be eliminated. If it does have downstream dependencies, then it can be redesigned to reduce the cost of delivery while protecting the available downstream value. We call this the TOP 90-60 Optimization Principle delivering at least 90% of the available benefits for only 60% of the initial costs by deleting too-expensive to deliver outcomes and benefits. This is just another way the TOP Value Equation can contribute to the value of your project portfolio. Summary Executive management and the Board must understand this Equation and its implications. A full understanding the components and nature of The TOP Totally Optimized Projects, 2007-2014 "16

The TOP Value Equation Value Equation enables you to know how to identify and deliver the optimum value from each and every project. Business value is comprised of 3 separate elements the desired business outcomes, the associated business benefits, and their (financial) value And they each need to be identified, delivered and measured separately. The actual business value realized is determined by 3 separate elements the benefits value drivers, the quality of the project delivery, and the persistence of the business in reaping the benefits. Deficiencies in any one of these 3 elements can undermine or destroy the available value. Currently it is the business delivery elements that are most often missing or are seriously under-performed. The value targeted is determined by how well the outcomes are identified and stated how well their benefits are maximized and optimized and the value drivers are rarely identified, tracked or managed. The management of the value delivered is determined by how well the value drivers are identified, tracked and managed from day-1. The Value Equation equips you to first maximize and then optimize and then manage the full delivery of your project investments. The TOP Value Equation underpins the whole TOP approach to strategy execution and value delivery. www.totallyoptimizedprojects.com Totally Optimized Projects, 2007-2014 "17