Tuesday, March 11, 2008

Business Value

Managers like to talk about business value. It usually goes like this:
A group of managers sit around a table. It may be in a conference room, around a dinner table, or in a bar. "We must offer more business value," one of them says. Everyone nods in agreement. Then it grows silent. Uncomfortable. Everyone carefully avoids looking directly at anyone else. Finally, someone breaks the silence: "Anything interesting on TV tonight?"
Agile software developers caught on to the notion of delivering business value several years ago. As a result, software developers now have the same sort of dead end conversations about business value their managers have, with the same result.

I have played this little game myself upon occasion, both as part owner of a consultancy, and as a developer. It always played out the same way.

I was reminded about this today when I read an InfoQ article about business value. The article quoted extensively from an article by Joe Little, Toward A General Theory of Business Value. Both articles raise the question "what is business value?" Luke Hohmann has also blogged about business value, and InfoQ has an article about measuring success from the customer's point of view.

I'll focus on answering questions raised in the first two articles mentioned. Both articles are invitations to much needed discussion. Little does list a set of requirements for a business value based engineering approach, but before examining that, lets begin with a basic definition of the term business value.

Wikipedia has the following definition:
In management, 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.
The first thing to note is that business value depends on context. The term business value means different things for different companies.

What is less obvious, but extremely important, is that because different parts of the same organization have different goals, business value means different things to different people in the same organization.

Thus, a group of managers that sit down and try to agree on a simple, yet specific definition are doomed to fail. Software developers have a slightly different problem: they usually don't know what their own organizations goals are, and even less about their customers goals. Under those circumstances, they too are doomed to fail.

Still, if you look at it from a systems thinking, or Theory Of Constraints, point-of-view, there isn't much of a problem at all. For a systems thinker it is obvious where to begin:
Before we can know what adds value to a system, we must know the goal of the system.
The goal of a company is usually to make as much money as possible now and in the future.

What brings us closer to the goal? The top level is easy. We need a healthy cash flow, and we need to optimize the Return On Investment (ROI).

Return On Investment is a composite value:

ROI = (Throughput - Operating Expense) / Investment

The question becomes what do we need to ensure a healthy cash flow, optimal Throughput, and optimized Inventory and Operating Expenses?

We can express this using an Intermediate Objective map, like this:
An Intermediate Objective map is unique. It is possible for two organizations to have identical maps, but it is extremely unlikely. Therefore, replacing the question marks with specifics, requires working with each organization.

I published my own organization's IO map awhile ago. Have a look at it if you want a full-blown example.

Once you understand the goal of an organization, or, using TOC terminology, the Goal, Critical Success Factors (CSF), and Necessary Conditions (NC), you have a basis for defining business value for an organization. Something has positive business value if it helps you achieve an NC, CSF, or the Goal. Usually, the something affects an NC, so the effect on the CSFs and the Goal is indirect.

Note how important it is to delve down a bit. If you stop to high, for example at the ROI component level, you get a definition that is technically correct, but practically useless. Delve too low, and you will get bogged down in too much detail. (TOC has other tools for that.)

You should be aware of two things: first, there is more to constructing an IO map than I have shown here. IO maps are part of a system, The Logical Thinking Process (TLTP), and you need to know the system very well to make a good IO map. Second, there are alternative methods, for example Strategy Maps and Strategy & Tactics Trees.

Now we are ready to tackle a the problem of creating a Business Value based engineering approach. I am going to walk through each point in Joe Little's list:
  • a well-communicated high-level definition of business value (this might have multiple dimensions)
An Intermediate Objective map does that very well. Actually, the map shown above constitutes a good high level definition.
  • a well-communicated operational definition of BV for the specific effort
That would be a process level IO map.
  • a clear way to measure whether that hypothesis (as embodied in the operational definition) was correct; or how incorrect it was (probably a likelier outcome)
That would be a measurement system based on the IO map. I am working on a webcast about this, so I won't delve into it here.
  • a confirmation that this definition actually energized behavior (eg, the programmers wanted to see success in that way) and that it was used in a way that allowed small adjustments toward a better outcome
You get such confirmation by measuring an whether an action regarding an entity low in the IO map has an effect on an entity higher up.

Then again, your tastes may run to behavioral analysis techniques. I'd suggest using the IMPACT model, and of course ABC analysis. (See Unlock Behavior, Unleash Profits by Leslie Braksick.)
  • a clear set of practices for using this definition throughout the course of the project
That is what the measurement system provides, incitement to move towards the NCs in the IO map.
  • a clear way to modify those practices, so that better practices could emerge over time
Since we are using TOC's IO maps, why not also use TOC's Focusing Steps for continuous improvement? I feel another webcast coming on.
  • a common understanding about the time-boxes around the practices, and a continual questioning about whether those time-boxes (presumably at different frequencies, depending on the practice) were the most effective in guiding a better delivery of business value in this specific case
Now we are talking! Full TLTP analysis! OODA loop based Strategic Navigation! Many agile teams already use an andon (from Lean). Maybe it's time to throw in a bunch of other Lean techniques, and data analysis tools from Six Sigma.
  • a set-out way to develop the people to perform these engineering practices (training and the like)
Ah, hrrm, got me there. Training in all the techniques I have mentioned above is available, but as far as I know, there is no training program that brings it all together.

One of the problems is that for such a training program to work, you will probably have to train software engineers and their managers together. Otherwise it will be hard to get them to pull in the same direction.
The agile community already has everything it needs to define business value for every agile software development project in the world. The tools are available. The information needed can usually be obtained through a TLTP analysis (or similar).

Of course, the same goes for the entire business community. After all, we are talking about the same tools, tools for examining systems, and reasoning about systems, tools that can be used by managers and engineers alike.

TOC and Systems Thinking tools aren't unknown in the agile community. David Anderson wrote a book about TOC in software development, Tom and Mary Poppendieck have written two excellent books about adapting Lean techniques for agile software development, Kent Beck mentions TOC in his eXtreme Programming 2.0 book.

Systemic approaches to specifying requirements, like Goal Directed Design, have been around for a long time. Alistair Cockburn uses a systemic approach for specifying requirements in the Crystal family of agile methodologies. (I almost wrote analysis, but specifying requirements well requires synthesis, understanding the whole, before analysis, understanding the parts.)

The agile community seems to be facing the same problem managers have been facing for more than forty years. All the tools, and all the knowledge they need is there, right before them, but as a whole, the community does not get it. Individuals, and small groups do, no question about it. The community as a whole, probably not.

The lethargy of the business community as a whole is a problem for the community, but for you and your company, whether you are a manager or a foot soldier, it is an opportunity. Learn how to define and deliver maximum business value, and you have a competitive advantage that will last for decades. Learn what it means to get inside the OODA loop of your competition.


Unknown said...

I like your article a lot.

I once wrote an article on a siimilar issue for the summer issue of AgileDevelopment (the quarterly e-magazine of the agile alliance).
A pre-release draft is available from http://www.catalysts.cc/fileadmin/public/articles/Focus_on_the_Goal_0.4.pdf

I've been using the IO Map and the other thinking processes to develop my own business (www.catalysts.cc).
I've recently given a talk about "Do you eat your own food" at a TOC Experts Meeting in Germany (see http://files.toc4u.net/).
You may find some interesting points in that presentation.

Kallokain said...

Great material!!!

I really liked the article. The "Do you eat your own food" presentation was even better.

Truly inspirational! I wish you the best of luck.

Fred Wiersma said...

Henrik, good article! Unfortunately I can't read the diagram on http://bp0.blogger.com/_vVBx0vyQqUM/R4gNyQBxV3I/AAAAAAAAADo/AQPk2_mnaBM/s400/io_map_hmmt.png It's too small and when I enlarge it, it becomes unreadable.

Best regards,
Fred Wiersma

Kallokain said...

Thanks for pointing out the faulty link. I have fixed the link in the article so it points to the right illustration. The correct link is http://bp0.blogger.com/_vVBx0vyQqUM/R4gNyQBxV3I/AAAAAAAAADo/AQPk2_mnaBM/s1600-h/io_map_hmmt.png