Understanding Stakeholder Value Agile Edge Grant Rule Sms

Understanding
stakeholder value

Agile Edge – 1st October 2009

Software
Measurement
Services

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

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
• 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
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?

Know-how

Raw Engineers

materials Know-how
1 Engineers

Know-how
2 Engineers

Know-how
Financial investment 3 Engineers
is combined with raw
materials, information, 4
human talent, know-how
& effort, to manufacture
products & services Products End Consumer
& services

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

New know-how,
intellectual
Raw materials property

The Business
& Workforce

Information, human End Consumer
talent, know-how Manufactured
& effort products & services

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

New know-how,
intellectual

Financial
investment

Investor
Financial
return

Information, human

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

New know-how,
intellectual

Financial Partners,
investment Families,
Community
Society
Partnership,
cooperation, Financial
collaboration return

Information, human

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

H2O, CO2/O2, N2, cycles
New know-how,
fuels, land, etc.
intellectual

Financial Partners,
investment Families,
Community
Partnership,
cooperation, Financial
collaboration return

Information, human Consumed &
talent, know-how recycled resources, Manufactured
& effort waste products products & services

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

Manufactured Capital

Financial Capital
Social Human
Capital Capital

Natural 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):
– 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 Five Flows
• Financial debt : represents labour • Cash flow :
and/or tradeable assets invoicing, accounts payable
• Physical debt : aka technical debt –
incomplete or missing quality, defects • Trade : flow of made goods
that will need correction
• Knowledge debt : aka ignorance – lack • Knowledge flow : training, education,
of know-how needed to achieve some communication, creation & loss of
goal intellectual property
• Social debt : unfair social conditions,
poor education, inadequate • Community spirit : human interactions,
healthcare, unemployment, inter- will to cooperate & collaborate,
community tension, disloyalty to family exchange of favours
& community, favours owed
• Environmental debt : pollution, • Flow of natural resources : H2O,
damage to the natural regulatory CO2/O2, N2 cycles; growth & decay;
cycles, disruptive change to habitats, population dynamics; oil & gas cycle;
non-sustainable land use tectonic movement; evolution;


Debt results from a Debts must
be paid
delayed, uneven or eventually…
by someone
unrecognised trade
Imposing debts
or compromise 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

Know-how

Raw Engineers

materials Know-how
A Engineers

Know-how
B Engineers

Know-how
C Engineers
Each organisation forms
one reach of the extended D
value stream, and is
dependent on others
Products End Consumer
& services

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

alignment by e.g.
accurate budgets – on-time delivery –
agreeing a firm’s effective standards – quantified capability

‘True North’ direction 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
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
• 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:
• 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
• 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:
• 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 Costs
Value : >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
• 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

Breakeven
1st Release


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

Cumulative
value

Time

Breakeven
1st Increment 1st Release


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

Max in agreed time w/o
Size undue compression
• The customer identifies a need
• A rough functional scope is
+30% estimated in function points
Price Points £/cfp • An allowance is made for scope
+20% creep & change
+10% Ideal Actual • The customer & vendor agree a
price per function point
Tolerance
Tolerance Reserve • The customer & vendor teams
Capacity
. cooperate to refine requirements &
deliver value incrementally

Baseline • Scope, change & progress is
Initial monitored throughout by an objective
Estimate 3rd party Scope Manager
Size in COSMIC
function points • 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.
1.Demand
• SIZE: Assess the size range using Rule’s Relative Size Scale (S, M1, M2, L, XL, etc)
Phase • 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
• RFP: Issue a Request For Proposal (minimise risk using at least 2 vendors)
• EVALUATE: If the risk warrants
2.Select & • Conduct capability evaluation of vendor (CMMI-DEV)
Negotiate • Conduct appraisal of customer acquisition practices (CMMI-ACQ)
Phase • AGREE: Agree a simple, short contract
• Expected scope = baseline + tolerance
• Unit price regime for expected scope + price for late changes
3.Value • DESIGN: Cooperate to develop detailed product architecture; compile Product Backlog
Delivery • 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)
Phase
4.Review • REVIEW: Conduct a retrospective of results quarterly, half-yearly, annually
Phase • Frequency depends on risk, customer satisfaction, level of cooperation, etc.


Summary:

• Understand value if you want to deliver
value
• 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 863 760
E: g.rule@measuresw.com

If you have been…
…thanks for listening


Understanding Stakeholder Value Agile Edge Grant Rule Sms

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