Understanding
     stakeholder value

                   Agile Edge – 1st October 2009

                 Software
        ...
Your presenter



                                          P. Grant Rule,
                                          Manag...
This talk is about
       understanding &
       sustaining
       value…

      • It’s about accounting for the total cos...
Why should you invest time & effort to
  understand value?


      • A deep understanding of value helps you:
            ...
Effective organisations understand value…
  …and perform x4, x5 or more times ‘the norm’




© Copyright Software Measurem...
The principles of lean systems thinking


      • Value – understand what value means to the stakeholders
      • Value st...
Whose value?
  Which stakeholders?


                             Know-how

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


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


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


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

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



                      ...
The Five Capitals model

   •    Financial Capital (‘treasure’ - a means of exchange):
          – Finance has an importan...
Good governance
       implies management
       of threats to value in
       the form of…

      • Capital assets
      ...
Each capital has matching debts and flows


      Five Debts                                                      Five Flo...
Debt results from a                                            Debts must
                                                ...
We all work in
       extended value
       streams


      • Our stakeholders include the customers of
        our custom...
Maximum value is sustained when organisations
  align their activities to common goals


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

       ...
Value is a measure of ‘cost effectiveness’ - the
  relationship between a functional need and the cost to
  meet that need...
Value = Worth / Whole-life Costs


      • Value
              • The true value of a product or service is the relationshi...
Value = Worth / Whole-life Costs


      •     Whole-life Costs
              • The true cost includes not only the money ...
Value = Worth / Whole-life Costs


      •     Worth
              • The worth of a product involves many features, includ...
Determining the worth of a function


      •     “The worth of a function is the lowest price we must pay to reliably acc...
Value = Minimum Cost / Whole-life Costs
  Value : >1.0 good value --- <1.0 poor value


      • Function worth
           ...
Key challenge for both customer and vendor


   • “requirements cannot ever be stated fully in
     advance, not even in p...
Traditional contract management methods do
  not really address the customer & vendor needs


      • They pretend require...
Traditional ‘big design up front’ needs large
  investments, delays benefits & increases risk


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


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

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


                    •    OUTCOME: Ident...
Summary:



      • Understand value if you want to deliver
        value
      • Consider all 5 capitals – don’t rob Pete...
Think holistically,
       deliver
       incrementally




      • From concept to consumption


© Copyright Software Mea...
Questions?




                                                               ?
© Copyright Software Measurement Services ...
SMS are specialists at
     improving business
     outcomes from software-
     intensive systems


                   .
...
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Understanding Stakeholder Value Agile Edge Grant Rule Sms

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Valtech Agile Edge London Oct 1st 09. Guest speaker Grant Rule from SMS discusses the 5-capitals model for understanding value and sustaining delivery and accounting for the total cost of acquisition & ownership of softsystems. He argues that acquirers and producers of softsystems are more effective when they align with stakeholders desired outcomes, balancing the 5 kinds of value.

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Understanding Stakeholder Value Agile Edge Grant Rule Sms

  1. 1. Understanding stakeholder value Agile Edge – 1st October 2009 Software Measurement Services © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 1
  2. 2. 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. © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 2
  3. 3. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 3
  4. 4. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 4
  5. 5. Effective organisations understand value… …and perform x4, x5 or more times ‘the norm’ © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 5
  6. 6. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 6
  7. 7. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 7
  8. 8. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 8
  9. 9. While those who have invested in the business are seeking a return on their investment New know-how, intellectual Raw materials property Financial investment Investor Financial return Information, human talent, know-how Manufactured & effort products & services © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 9
  10. 10. Work depends on effective social institutions & results can add or detract value from society New know-how, intellectual Raw materials property Financial Partners, investment Families, Community Society Partnership, cooperation, Financial collaboration return Information, human talent, know-how Manufactured & effort products & services © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 10
  11. 11. 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 Raw materials property Financial Partners, investment Families, Community Partnership, cooperation, Financial collaboration return Information, human Consumed & talent, know-how recycled resources, Manufactured & effort waste products products & services © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 11
  12. 12. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 12
  13. 13. 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. © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 13
  14. 14. Good governance implies management of threats to value in the form of… • Capital assets • Debts • Flows © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 14
  15. 15. 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; © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 15
  16. 16. 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) © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 16
  17. 17. 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) © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 17
  18. 18. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 18
  19. 19. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 19
  20. 20. 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’ © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 20
  21. 21. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 21
  22. 22. Value = Worth / Whole-life Costs • 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) © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 22
  23. 23. Value = Worth / Whole-life Costs • 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 23
  24. 24. 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. © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 24
  25. 25. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 25
  26. 26. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 26
  27. 27. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 27
  28. 28. Traditional ‘big design up front’ needs large investments, delays benefits & increases risk Cumulative value Time Breakeven 1st Release © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 28
  29. 29. Incremental delivery creates more value – not just money, but know-how, capability, morale Cumulative value Time Breakeven 1st Increment 1st Release © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 29
  30. 30. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 30
  31. 31. 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. © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 31
  32. 32. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 32
  33. 33. Think holistically, deliver incrementally • From concept to consumption © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 33
  34. 34. Questions? ? © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 34
  35. 35. 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 © Copyright Software Measurement Services Ltd – All Rights Reserved Understanding Stakeholder Value / 35
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