Determining Business Value
Determining Business Value
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According to Wikipedia, “business value is an informal term that includes all forms of value that determine the health and well-being of the firm in the long run. Business value expands concept of value of the firm beyond economic to include other forms of value such as employee value, customer value, supplier value, channel partner value, alliance partner value, managerial value, and societal value. Many of these forms of value are not directly measured in monetary terms.”
Ulrich and Smallwood would concur with this last sentence about value measurements. In How Leaders Build Value, they state that eighty-five percent of a company’s market capitalization can be attributed to intangible factors such as leadership, culture, and patents. Investors look at the stream of earnings volatilityover time to determine price/earnings ratios (which determines market cap), and intangibles drive that stream—we just have to look at an intangible like Steve Job’s leadership to prove the point.
Given the turbulence and uncertainty of today’s business environment, picking the right intangible factors can be a daunting task, but I’ll offer that one of the key capabilities required is the ability to discover and capitalize on the opportunities that this turbulence creates. As Donald Sull, The Upside of Turbulence, says “Companies don’t pass through life cycles, opportunities do.” Sull’s lifecycle phases for opportunities are Start Up, Scale, Mature, and Decline (I would add Discovery to the front end of this lifecycle). A company’s ability to take advantage of opportunities requires a number of intangible factors critical to sustaining a flow of earnings.
So, to summarize—business value has both tangible (financial) and intangible components, intangibles are critical to long-term success, and the ability to capitalize on the flow of opportunities is a critical intangible capability for most companies.
To implement this focus on intangibles and opportunities, I propose using a model with Business Value Points (BVP) and a Business Value Points Matrix (BVPM) that would help prioritize projects (product development, etc.). Agilists have long used story points to measure cost. Story points are relative and non-financial (sort of). I’ve advocated calculating relative value points (Agile Project Management) for capabilities (epics) and features (stories are too low level) to indicate that value is important and to help teams prioritize features. But there is a better reason to use Business Value Points rather than dollars (or euros or yen)—it raises the visibility of intangibles and lowers the visibility of financial measures! This not to say that financials are unimportant, but that other measures are just as important. If Ulrich and Smallwood are correct, focusing on intangibles in the long term has a major impact on financials. We need a model to avoid over focusing on short term financials.
Since capitalizing on opportunities is critical to surviving and thriving in our volatile economy, the columns in the BVPM matrix would be “Start Up”, “Scale”, “Mature”, and “Decline”. The Rows in the matrix would be “Financial”, “Opportunity Capture”, “Customer Impact”, “Employee Impact”, “Social Impact”, and “Traits”, or some combination of these measures customized to your organization (the figure categories are abbreviated). The numbers indicate relative importance of the factors. For example, in a Start Up phase, financial results might be relative unimportant while opportunity capture very important. Conversely, in the Mature phase financial results might be the most important by far. Most of these factors are self-explanatory except for traits. Traits are behaviors and capabilities of employees. For example, in a volatile business environment it might be important for managers and staff to become more adaptable. A project to implement an Agile/Lean approach to product development would further the objective of increasing the “adaptability” behavior.
This approach changes portfolio management. For example, Mature projects can’t be directly compared to Start Up projects—each needs a “bucket” of dollars that is determined by an executive group. Within each category projects would be prioritized by assigning them a 1-100 value, using the table value in each category as a maximum. For example, using the Start Up category, project 1 might have a business value of 55 (financial-5, opportunity-30, social-10, trait-10) whereas project 2 has a value of 80 (financial-10, opportunity-35, social-20, trait-15). With a budget for Start Up projects (an entire additional article could be written on the problem with a fixed budget for this), a business value priority list might indicate that the “cut off” for funding would be 12 projects.
While this type of analysis might not be complex enough for financial types, we have to remember the objectives of relative business values:
- Aiding prioritization of projects
- Systematically utilizing non-financial (in addition to financial) criteria
Again, from looking at the table it becomes obvious that a complex, detailed financial analysis would not be useful in evaluating Start Ups, while it would be in evaluating the Mature category. Also at a portfolio level, each stage of opportunity capture needs a different portfolio management process. For example, whereas the Start Up phase needs fast, frequent review, the Mature phase review could progress at a more leisurely pace.
A similar model can be used at the capability or feature level, however of the criteria may be very difficult to assess. Traits, for example, while relevant on a project level, wouldn’t help prioritize at a feature level. Allocating BVP at a feature level would therefore require some adjustments to the criteria matrix.
This blog only scratches the surface of determining business value; however, it offers a model that addresses key issues in today’s world—speed, uncertainty, new technologies, etc.—from an opportunity management and intangible focus perspectives.
Published at DZone with permission of Jim Highsmith , DZone MVB. See the original article here.
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