Value-Driven

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Value-Driven organizations are structured around the delivery of value to customers by empowering individuals across an organization to make business decisions about how best to deliver that value. In this Value-Driven approach, budgets and cross-functional teams are tied to long-lived products, as opposed to short-term projects. Organizations that have shifted away from project teams and project funding to this more Agile model have seen a dramatic increase in time to market, quality and innovation.

Historically, information technology organizations have adhered to an operating model that presents numerous barriers to innovation and the creation of value for customers.

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Typically, projects are funded after an annual planning process that relies on upfront scope definition and traditional accounting metrics, like return on investment (ROI) or profitability to justify each project. Once funding is established, project teams are assembled from various functional silos to work on each project until the team delivers the agreed-upon scope.

Traditional budgeting requires a high level of certainty about project outcomes, and while operational activities may be relatively predictable year over year, new product development is less predictable. It may be impossible to accurately forecast project costs ahead of time. The customer demand for new products or features may not be immediately clear, and financial metrics associated with those products may be zero or entirely hypothetical in the early stages of development. As a result, this operating model often favors the funding of more predictable projects over projects that may eventually provide more business value.

In a Value-Driven approach, budgets and cross-functional teams are tied to long-lived products, not short-term projects, with tactical allocations of budget and staffing made throughout the year by product owners; product owners who make decisions based on non-financial metrics and relative business value. Organizations that have shifted away from project teams and funding to this more Agile model have seen a dramatic increase in time to market, quality and innovation.1

Characteristics

Organizations that embrace the Value-Driven Mindset embrace the following five practices:

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Value Streams

Value Stream mapping is a Lean management tool used to identify the process of delivering value to a customer. The Scaled Agile Framework® defines it as:

Value streams represent the series of steps that an enterprise uses to build solutions that provide a continuous ow of value to a customer. Value streams are the primary means for understanding business objectives, organizing teams and trains, and delivering end value. They are realized by Agile Release Trains.7

Organizing around long-term Value Streams, instead of by functional silos or short-term project teams, can increase the flexibility of teams to pivot to new value opportunities, and provide visibility into wasteful activities that don’t provide clear value to the customer.

Flexible Budgeting

Lean-Agile budgets are tied to Value Streams and the teams that realize those Value Streams, rather than specific projects.2 Such budgets allow those teams to make decisions about how to best create value without having to request new project-level funding every time product direction changes. This approach can also ensure that low-value ideas do not remain funded if they do not appeal to customers.

Decentralized Business Decisions

Flexible budgeting will not make an organization faster if business decisions remain centralized. The individuals best able to make business decisions, including product owners at a team level and product managers at a program level, should be empowered to make those decisions regardless of their organizational status. Without such decentralization, decision-making slows down and teams lose the flexibility to pivot to new value propositions when needed.

A recent Harvard Business Review study found a high correlation between overall financial performance and the efficiency of the decision-making structures that firms set up.3 This does not mean that all business decisions should be decentralized. As seen in the study, the most successful organizations set clear thresholds as to when financial decisions must be made by senior leadership.

Innovation Accounting

Value-Driven organizations identify non-financial metrics to measure customer value and base their business decisions on objective data rather than hunches. Innovation Accounting is a term from the Lean Startup movement to describe metrics designed to measure progress when traditional accounting metrics are not applicable.4 Popular examples include customer activation or retention metrics.

Relative Prioritization

Business decisions need not be based on traditional accounting metrics or even precise ‘level of effort’ estimates. Costs can be extremely difficult to estimate for IT projects; one in six projects has a 200% cost overrun.5 A better process is to use less precise size estimation, combined with business value rankings, to sequence jobs against each other or make simple determinations of whether jobs can fit in a given budget. The 2015 Standish Group CHAOS report found a higher degree of success on projects that used relative prioritization techniques instead of hard-to-develop ROI estimates.6

Pain Points

Organizations that do not follow Value-Driven best practices typically encounter a number of pain points.

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Increased Time-To-Market

Fixed project budgets and team structures often make it difficult for teams to quickly pivot direction based on customer feedback, changing market conditions, or other inputs. Delays can occur if a new team must be staffed to meet a different scope, or if changes need to go through a lengthy budgetary approval or contractual process before work can begin.

Missed Innovation Opportunities

Organizations that tie the funding of new initiatives to financial metrics may miss opportunities to greenlight innovative ideas. Accurate cost estimates or ROI and cash flow projections may not be available for new product ideas, and many such ideas never make it past an organizationÕs financial officers if they rely on traditional project accounting models.

Continued Investment In Low-Value Activities

Organizations that are not organized and funded around value may spend unnecessary time on activities that provide little value to customers. Project teams that are not part of larger Value Streams may miss opportunities to identify and correct low-value steps in the value delivery process, while project-based budgeting cycles may also result in projects and teams continuing to receive investment long after their original value proposition is gone.

Conclusion

Organizations that have historically funded their portfolio of projects through a yearly budgeting process miss opportunities to provide value to their customers. In a Value-Driven approach, cross-functional teams are funded as part of a Value Stream with discretion over how to best provide value to their customers without having to rely on fixed scope assumptions, inaccurate cost estimates, or difficult-to-obtain ROI forecasts.

References