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Portfolio management: Balancing Irrefutable Demand with Cost of Delay #agilecitylon


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Portfolio management is about balancing and hedging risk, as opportunities or threats are assessed, positions reviewed, and investment or dis-investment decisions are made. Why then is the focus of information flowing to portfolio managers primarily about schedule, scope and budget rather than value realisation? Why is success still judged by on-time-on-scope-on-budget rather than investment criteria such as yield and duration?
This presentation explores one reason: that the paradigm of the project, with its (usually annual) cycle of proposal, plan, implementation and delivery, is over-constrained for solving the complex domain where many portfolio managers operate – multiple overlapping products in competitive markets. Projects do not facilitate the dynamic monitoring of product applicability and profitability. Where “small change” processes are introduced to enable greater responsiveness, the cost and impact of such work may not even be visible at portfolio-management level. The presentation looks at the alternative paradigm of “value-flow”, particularly its realisation in Lean and Kanban approaches. It explains the concept of a kanban system and how it can be applied at product/programme level, covering many services that deliver value within the organisation and to its customers. It explains “irrefutable demand” – the perception that individual services receive work requests that cannot be refused – and how this works against flow, predictable deliveries and ultimately productivity. The primacy of time in investment decision-making is also stressed, particularly the importance of reducing “Lead Time” to reduce risk, and of understanding “cost of delay” as an economic basis for rational work scheduling.

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Portfolio management: Balancing Irrefutable Demand with Cost of Delay #agilecitylon

  1. 1. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 1 Portfolio Management: Balancing Irrefutable Demand with Cost of Delay Dr Andy Carmichael Sponsored presentation: Twitter: @andycarmich @AgileCityLon #agilecitylon Slides:
  2. 2. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 2 Physical book available from Amazon and other booksellers. PDF can be downloaded from Template can be downloaded from! Slides:
  3. 3. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 3 Agenda: Portfolio Management as Value-Flow Some themes: • Project paradigm versus value-flow paradigm • What are kanban systems? • How kanban systems scale? (Whole Organisation Kanban – WOK?) • What’s the problem with “irrefutable demand”? • Managing systems for flow rather than utilisation • The primacy of time in investment decision-making: • Focus on reducing “Lead Time” to reduce risk • Understand “cost of delay” as an economic basis for rational work management • Portfolio management is investment management • Yield • Duration • Risk • Complexity
  4. 4. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 4 The project paradigm vs value-flow paradigm • Project paradigm is ubiquitous from team to portfolio levels • Define scope and time horizon (introduce constraints) • Estimate schedule, budget and risk • Manage slack to ensure on-time-on scope-on-budget “In complex domains (e.g. multiple overlapping products in competitive markets), a project-centric model of the world is profoundly unhelpful!” • Value-flow paradigm • Manage investments to maximise probability of value realisation • Reduce size and risk of individual changes • Reduce Lead Times • Minimise cost of delay
  5. 5. Requests Selected Development Acceptance Complete Discarded Commitment Ongoing Ready 4 6 4 Delivery System Lead Time Kanban systems balance accepted demand with capacity/capability Released Receipt Customer Lead Time Request
  6. 6. Requests Selected Development Acceptance Complete Item per time period Discarded Commitment Ongoing Ready 4 6 4 System Lead Time Released Receipt Customer Lead Time Accepted Request Delivery Regular cadence Sync’ing System and Customer Lead Time Time in Dev Time in Route to Live
  7. 7. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 7 The 3 Dimensions of Scaling Kanban Chains: expand the scope (before / after) Portfolio Product Service Personal Products - Goals Strategic Direction Features - Value Product Management Stories - Delivery Day to day Leadership Tasks - Focus Individual Professionalism WEEKS/ DAYS DAYS/ HOURS MONTHS/ WEEKS YEARS/ QUARTERS Hierarchies: related work items with different sizes, timescales and levels of decision-making (scale-free Kanban) Networks: management of interdependent services at the same level
  8. 8. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 8 Good kanban systems support good decision-making at every level • Personal/team: focus / professionalism / quality • Service: deciding on timely delivery of value • Product: deciding where the value is • Portfolio: deciding the balance of investments that will fulfill strategy, while hedging known and unknown risks
  9. 9. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 9 What is “irrefutable” demand? Request for services that cannot be denied or refused “we’ve already committed to do it” “the boss wants it” “there’s no one else that knows how to do it” “it’s a legal requirement” “the customer needs it”
  10. 10. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 10 Irrefutable demand… isn’t!
  11. 11. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 11 Demand and capability must balance … eventually • Ignoring imbalance will turn a “flow” system into a “blocked” system • Several important concepts in Kanban address the issue: • Deferred Commitment • Limiting WiP • Managing Flow • Elevating the constraint • Classes of Service – Cost of Delay. • Feedback loops – Cadences • Resource Management – Staff Liquidity The goal of a balanced system is to maximise the flow of value
  12. 12. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 12 Manage Flow: Utilisation (WiP), Delivery Rate and Lead Time • Capacity is finite (and lower than you think! • Increasing utilisation increases LT (not much at first) • Increasing utilisation increases DR (at first) • At a certain point flow is destroyed. DR collapses. LT tends to infinity! • Near the critical point, flow is fragile. Perturbations have severe, unpredictable and long-lasting effects. • The critical point depends on variability
  13. 13. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 13 Resource Efficiency or Flow Efficiency First focus on flow… then efficiency “What is Lean” – Niklas Modig and Par Ahlstrom
  14. 14. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 14 Flow systems can create delays and inefficiencies as they scale Systems Thinking Service Service • optimise the whole not the parts • plan as a whole, balance demand • make queues visible • flexible resources Internal (invisible?) queues. Optimise the whole Commitment at higher level creates “irrefutable demand” at lower level or downstream. Reserve capacity / classes of service Blockers and dependencies hamper flow. Blocker analysis may reveal service imbalance
  15. 15. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 15 The primacy of time in investment decision- making: • Focus on reducing “Lead Time” to reduce risk and improve feedback • Understand “cost of delay” as an economic basis for rational work scheduling
  16. 16. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 16 ValueLead Time Minimising Lead Time The new iron triangle? • Fit for purpose quality (non-negotiable) • Maximum value (visible only in retrospect) • Minimum lead time (the immediate imperative) Quality
  17. 17. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 17 Understanding Cost of Delay as a driver for better Portfolio Management decisions • Cadence versus deadline • Effect of artificial deadlines • Discovering the real deadlines (where Cost of Delay changes abruptly) From Alexei Zheglov @az1 -
  18. 18. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 18 Time “is” Money? Time (t) influences Value (V) 𝐷𝑒𝑙𝑎𝑦 𝐶𝑜𝑠𝑡 = − 𝜕𝑉 𝜕𝑡 Δ𝑡 “Cost of Delay” (CoD) Make visible at Portfolio level (involve the accountants!) A rate of change in value e.g. measured in dollars per week or “Urgency”? A Cost – e.g. measured in dollars
  19. 19. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 19 Value flow from a new development (Benefit Profile) with no delay, 10-week, and 20-weeks delay
  20. 20. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 20 Delay Cost Profile and Urgency/CoD Profile
  21. 21. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 21 Value isn’t just increased profit… • Protecting loss of profits • Increased turnover • Protecting brand loyalty • Increased learning • Reduced risk • Cost saving • New market option • Cover competitors’ moves • Staff retention • Process improvement • etc… How would you put a monetary value on each of these? Source: David J Anderson
  22. 22. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 22 Probabilistic Forecasting • How urgent is it to start this item? • Pay attention to the “last responsible moment” for starting a work item (say, 85% probability point)
  23. 23. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 23 Probabilistic decision making. • The likelihood of event X occurring • The effect of event X occurring – f(X) • The number of times you get to make similar decisions • Optimising at subsystem level is dramatically less effective • Entrepreneurial organisation • The right level of exposure to risk (survivable risk) • Avoidance of deadly risk (non-survivable risk)
  24. 24. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 24 Portfolio management is investment management • Yield / ROI (% average annual rate of return for initial investment) • Duration (weighted average of the times until those cash flows are received) • Risk (the potential of gaining or losing something of value) • Options • Hedging • Payback functions • Complexity (wicked problems) • There are no good answers • The path will be created with every step • The art of learning how to play • Emergent practice
  25. 25. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 25 Conclusions Chains Hierarchies • Kanban systems mitigate the issue of “irrefutable demand” balancing demand with capability • Kanban systems can be connected into scaled systems – Chains, Hierarchies, Networks • Minimising Lead Time – by committing to smaller items in WiP limited systems – is key to limiting risk • Cost of Delay is a key component of value- based decision making • Portfolio management is investment management (Yield, Duration, Risk-hedging) • Handle complexity: • Governing constraints (Good Practice) or • Enabling constraints (Emerging Practice) Slides:
  26. 26. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 26 References and Bibliography Anderson, David J. 2010. Kanban: Successful Evolutionary Change for Your Technology Business. United States: Blue Hole Press. Anderson, David J. 2012. "Thoughts on the value of liquidity as a metric." November 27. Anderson, David J. 2015. Enterprise services planning scaling the benefits of Kanban. 29%20EnterpriseServicesPlanning_david%20 anderson_0.pdf Anderson, David J., and Andy Carmichael. 2016. Essential Kanban Condensed. United States: Lean Kanban University. Berger, Jennifer Garvey; Johnston, Keith (2015). Simple Habits for Complex Times. Stanford, CA: Stanford University Press, 237, n. 7. Brodzinski, P. 2015. Portfolio Kanban Board. [Blog] Software Project Management: Lean, Agile and Kanban. Available at: Brougham, Greg. 2015. The Cynefin Mini-Book: An Introduction to Complexity and the Cynefin Framework. United States: C4Media for InfoQ. Maccherone, Larry. 2015. "Probabilistic Decision Making." November 6. making Matts, Chris. 2013. "Introducing staff liquidity (1 of n)." 2013/11/24/introducing-staff- liquidity-1-of-n/ Matts, C. 2015. Weighted lead time. https://theitriskmanager. Modig, Niklas and Pär Åhlström. 2012. This Is Lean: Resolving the Efficiency Paradox. 1st ed. Stockholm: Rheologica Publishing. Morris , Ben, Simon Notley, Katharine Boddington, and Tim Reesa. 2001. “External Factors Affecting Motorway Capacity”, 6th International Symposium on Highway Capacity and Quality of Service, pp 69–7. Stockholm, Sweden June 28 – July 1. Reinertsen, Donald G. 2009. The principles of product development flow: second generation lean product development. Redondo Beach, CA: Celeritas Publishing. Stoop, Edwin, 2016. A sketch of the Cynefin framework, a decision- making tool used in management consultancy, Sketching Maniacs, _Stoop.jpg Slides:
  27. 27. ©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017 28 Questions and Discussion Next steps… Twitter: @andycarmich @AgileCityLon #agilecitylon Slides: