Business Value is the Motivator for Projects


Business Value is the Motivator for Projects

The fact is, the "business of business is to increase shareholder wealth." This sentiment paraphrases the thinking of many executives going back all the way to Adam Smith in the 18th century. In his well-known book, The Wealth of Nations, published in 1776, business leader Smith wrote: "Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, his own gain." By all current measures, Mr. Smith was very self-centered and not community oriented. Nevertheless, it is as true today as it was more than two centuries ago that many businesses put financial performance at the top of the value chain.

Insofar as projects return more in financial resources than they absorb, we could then conclude that those projects are valuable to the business. It only remains to set up the mechanisms to make effective financial measures. We will take up financial measures in later chapters when we discuss capital budgeting and cost management. We will examine the concepts of sorting projects on the basis of their risk-adjusted returns calculated as either their net present value or their economic value add. Coupling scope with financial returns leads us to the concept of earned value. Earned value is indispensable for evaluating the true value of a project to the business.

Over time, several models have evolved to describe other sources of business value that are effective tools for project managers. Project managers are often called on to contribute to the selection of projects, to interpret the voice of the customer when setting scope, to evaluate the discretionary investments in upgrades and enhancements throughout the life cycle, and to assist with the rollout and deployment of the project deliverables to the end users and customers. Familiarity with the sources of value to executives, suppliers, users, and customers only enhances the value of project management per se. These value models convey understanding of the hot buttons of those constituents.

The Balanced Scorecard

One model in current and widespread use is the balanced scorecard. The balanced scorecard is an idea invented by Robert S. Kaplan and David P. Norton. Writing first in the Harvard Business Review in an article entitled "The Balanced Scorecard — Measures That Drive Performance," [5] Kaplan and Norton described four scoring areas for business value. One, of course, is financial performance. Financial performance is often a history of performance over the reporting period. Though historical data provide a basis to calculate trends, in effect indexes for forecasting future results, by and large the focus of financial performance is on what was accomplished and the plans for the period ahead. Almost all projects and all project managers must respond to financial performance.

Three other balanced scorecard scoring areas also fit well into the business of chartering, scoping, and selecting projects. These scoring areas are the customer perspective of how well we are seen by those that depend on us for products and services, and exercise free will to spend their money with our business or not; the internal business perspective, often referred to as the operational effectiveness perspective; and the innovation and learning perspective that addresses not only how our business is modernizing its products and services but also how the stakeholders in the business, primarily the employees, are developing themselves as well.

For each of these scoring areas, it is typical to set goals (a state to be achieved) and develop strategy (actionable steps to achieve goals). The scoring areas themselves represent the opportunity space. As we saw in Figure 1-3, goal setting and strategy development in specific opportunity areas lead naturally to the identification of projects as a means to strategy. Specific performance measures are established for each scoring area so that goal achievement is measurable and reportable.

Typically, project performance measures are benefits and key performance indicators (KPIs). KPIs need not be, and most are not, financial measures. In this book, we make the distinction between benefits, returns, and a KPI. Benefits will be used in the narrow sense of dollar flows that offset financial investment in projects. Returns, typically expressed in ratios of financial measures, such as return on investment, and benefits, typically measured in dollars, are sometimes used interchangeably though it is obvious that benefits and returns are calculated differently. KPIs, on the other hand, are measures of operational performance, such as production errors per million, key staff turnover rate, credit memos per dollar of revenue, customer wait time in call centers, and such.

The Treacy-Wiersema Model

Michael Treacy and Fred Wiersema described a model of business value in their study, "Customer Intimacy and Other Value Disciplines," [6] published in the Harvard Business Review, and expanded further in their book, The Discipline of Market Leaders. [7] Closely aligned with the balanced scorecard, the Treacy-Wiersema model has three focus areas. The first is customer intimacy, in which the concept of relationship management as a business value is foremost. Customer intimacy is characterized by a harmonious alignment of business values in a chain that interconnects the customer and the business. Product, service, and support are more or less tailored to an individual customer. Many projects, especially in the evolving "e-business" of integrated business systems, are aimed squarely at customer intimacy. The objective of these e-business projects is to provide complementary cross-user functionality and shared workload across the channel, presumably doing the task at the most effective end of the channel at the least or most effective cost. A subtler objective is to raise barriers to exit of the relationship and thereby close out competitors. It is almost axiomatic that the cost of sales to retain and nurture an existing customer is far less than the cost of marketing, selling, and closing a new customer.

The second focus area of the Treacy-Wiersema model is product excellence or superiority. The objective is to be differentiated from competitors and create an "ah-hah!" demand. Obviously, such demand can usually command a price premium. There must be a dedication to innovation, upgrade, and new ideas. Risk taking, at least in product and service development and delivery, is the norm. Naturally, this is a target-rich area for project managers, and the performance measures are typically market share, customer satisfaction, revenues, and profits.

The third area is operational excellence. Internal processes, methods, and procedures are made as "frictionless" as possible. Repetition is exploited to reduce errors and minimize variance to the mean outcome. This area is taken quite broadly and would in most businesses encompass some of the innovation and learning goals from the balanced scorecard. A good example of operational excellence exists in the back-office billing and administration systems. As an example, health-care administrator companies strive to be operationally excellent, providing uniformly the same service to each and all customers.

Treacy and Wiersema make the point that it is difficult, if not out and out inconsistent, to excel in all three areas. Product excellence and operational efficiency may conflict culturally and financially. Customer intimacy may also conflict with operational efficiency. You would not expect customer intimacy from your health-care administrator; you want a frictionless, repeatable experience with a call center if you need help. Operational efficiency could be the mantra of the low-cost commodity provider, and many customers would be quite happy with that. Of course, for commodity providers there are few barriers to exit, and customers vote with their feet and their pocketbook.

The Kano Model

The Kano model is more narrowly focused than the former two models discussed. Named for Dr. Noriaki Kano and widely described in the literature, [8], [9] the model is aimed at capturing the voice of the customer for requirements for products and service. Originally conceived in the 1970s as a quality tool for obtaining a good match of customer need and product feature and function, project managers can apply this tool not only for grading requirements but also for evaluating budget allocations and priorities, and for assessing qualitative risks. In this regard, Kano models are quite useful for project managers who must make dollar decisions about where discretionary funds can be best leveraged for business value.

Kano really only addresses two of the focus areas already described: customer perspective and product excellence. The Kano model pretty much ignores operational effectiveness, except as operational effectiveness is reflected in product or service quality that influences customer satisfaction. Of the three models, the Kano model is very tactical and applies readily to projects.

The Kano model is most often represented as a graph, with two axes as shown in Figure 1-4. The vertical axis is the customer satisfaction scale, reaching from very satisfied, to indifferent in the center, to very dissatisfied. Although a numeric scale is not often used, project managers seeking more quantification could apply a scale. [10]

click to expand
Figure 1-4: Kano Graph.

The horizontal axis is product or service functionality or performance. To the right is desired or available functionality or performance, with stronger desire or need represented by a farther distance outward from the center. To the left is missing functionality or poor performance. Again, the same ideas of numeric scaling could be applied to this axis. In the center is a neutral area in which functionality is unevaluated, but also this is where the center of the customer satisfaction axis crosses.

Of course, the axes are laid out on a graph to cross at the center and provide an orthogonal space in four quadrants suitable for plotting. In this space, a set of curves is plotted. Let us consider the first quadrant in the upper left of the plotting space. We see this illustrated on the Kano graph. In this quadrant, customer satisfaction is increasing, but there is little expectation for functionality. In this space are latent, or unspoken, requirements — missing functionality but also unknown or unappreciated by the customer. In the upper left quadrant there is little or no impact on customer satisfaction. From the project management perspective, this space means that no investment need go into filling the missing functions since they have little impact. However, there is opportunity insofar as a function or feature might be "promoted" from the upper left quadrant to the upper right quadrant.

The upper right quadrant is the "ah-hah!" space where the customer recognizes increasing, available, or known functionality as real value add. Kano calls this the customer delight quadrant. In the upper right quadrant are functions and features that the customer did not know were wanted until the functions were revealed. This is the quadrant of "home runs" and new-to-the-world product risks. Spending is discretionary in the upper right quadrant. For the project manager, requirements plotted in the upper right quadrant carry above-average risk, increasingly so as the plot moves farther from the center origin. The impacts on cost management and schedule are more probable, making their risks rise to the top of the list of risks to be watched.

Moving to the lower half of the plotting space, we next consider the lower right quadrant shown on the Kano graph. This is an area of distress. The customer is not satisfied in spite of function, feature, or service that is provided. The project manager is compelled to address these requirements, dedicating resources to their fix. Resource allocation to this quadrant competes with the resources that might or should go into the upper right quadrant. The project manager, along with other team members, particularly whomever holds the best relationship with the customer, must make the call about resource contention between the upper and lower right spaces.

Finally we come to the lower left quadrant. This quadrant is the flip side of its cousin above. If functionality is missing or poorly provided, the customer is unhappy, perhaps very unhappy. This quadrant consumes resources for the needed fix, competing with the other two (upper and lower right) as shown on the Kano graph.

There is actually a fifth space, really only a line: the horizontal axis. Along this axis, function and feature may be provided, as on the right side, or not provided at all, as on the left side, but the customer cares not one way or the other. This is the line of total indifference on the part of the customer. In fact, we plot the first of our curves along this axis and label it the "I" curve for indifference.

What may lie along this axis? Actually, quite a lot usually goes here. Project managers put all the regulatory requirements, whether internal or external, on this axis. What about risk? Well, some of these requirements may carry quite a lot of risk but add nothing to customer satisfaction, at least as perceived by the customer. Certainly the project manager should take no more risk than necessary and challenge any new additions to the "I" requirements.

There are three other curves that are more interesting. [11] The first is the "L" curve, or the linear line that extends from the lower left to the upper right through the center. This is the "more is better" line. For features represented on this line, providing "more" simply increases customer satisfaction. A good example is computer memory: more is better, always! Correspondingly, a lack of memory will upset the customer, and the more missing the worse will be the effect. From the point of view of meeting the competition, it is almost mandatory to fund these requirements, at least to some degree, to stay in the race. Commensurate risks must be taken, or else product obsolescence will doom all future sales.

A third curve is the "M" curve, which stands for "must be there." The "M" curve is shown in Figure 1-5. Running along the horizontal axis on the right side, and dipping into the lower left quadrant, the "M" curve is appropriate where the presence of a function raises little reaction with the customer, but if the function is missing, then there is customer dissatisfaction. With requirements of this type, the project manager should take no risks and invest only that which is necessary to maintain the function without adding to it. Now, there is opportunity to "promote" from "M" to "I". Did Apple make this move when it dropped the floppy disk drive in its desktop computers?

click to expand
Figure 1-5: Kano Curves.

Perhaps of most interest is the "A" curve, which stands for the "ah-hah!" reaction. It is the mirror image of the "M" curved flipped around so that it runs along the horizontal axis on the left side and then rises into the upper right quadrant. Requirements along the "A" line do not upset the customer if missing but engender a very favorable reaction if present. If acted on, "A"s are the requirements of greatest risk, perhaps new to the world. "A"s require the most attention in terms of funding, risk management, and performance measurement.

Table 1-1 provides a summary of a potential product analyzed with the Kano model. Here we see a list of requirements that are characterized by their funding need, risk potential, and fit to the Kano plot space.

Table 1-1: Kano Example, Personal Computer

Requirement

Funding

Risk

Packaging and eye appeal

Discretionary investment targeted for high returns

Take all necessary risks to assure success

Faster CPU and larger memory

Constant refreshment required; reserve funds to meet needs

Take prudent risks to maintain market acceptance

FCC compliance

Mandatory funding to meet minimum requirements

Take no risks not essential to meeting compliance specification

Floppy disk drive

If market demands, fund lowest cost supplier

Take no risks; mature device

CD-RW drive

Initially, discretionary investment targeted for high returns

CD-RW decays to M quickly; minimize risk to balance rewards

[5]Kaplan, Robert S. and Norton, David P., The balanced scorecard — measures that drive performance, Harvard Business Review, pp. 71–79, January–February 1992.

[6]Treacy, Michael and Wiersema, Fred, Customer intimacy and other value disciplines, Harvard Business Review, pp. 84–93, January–February 1993.

[7]Treacy, Michael and Wiersema, Fred, The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market, Perseus Books, Cambridge, MA, 1996.

[8]Kano, Noriaki, Attractive quality and must-be quality, Journal of the Japanese Society for Quality Control, pp. 39–48, April 1984.

[9]Shiba, Shoji, Graham, Alan, and Walden, David, A New American TQM: Four Practical Revolutions in Management, Productivity Press, Portland, OR, 1993, pp. 221–224.

[10]The scales applied to the Kano model need not be linear. Indeed, a logarithmic scale going from the center origin toward the outer reaches of satisfaction, both positive and negative, could be quite helpful if there is great range to be plotted. Or, the logarithmic scale could be applied to product functionality, left and right. Applying a scale to one or the other of the axes creates a "log-linear" plotting space. Of course, project managers familiar with logarithmic scales will know that a straight line plotted on a log scale will be a curve.

[11]In the original Kano model, which grew out of work in the 1970s for the camera company Konica, there were in fact only three curves. The "I" curve along the axis was not included. Kano named his three curves a little differently than as presented here. Kano's names were: "excitement" for the curve this book calls the "ah-hah!" reaction, "performance" for "more is better," and "threshold" for "must have." Many references in the literature use the original names. Dr. Kano's research objective was to model "attractive quality" and distinguish that from "must-be" quality. "Must-be" quality was seen as a minimum or threshold to customer satisfaction. Below this threshold, customers would object; at the threshold, customers would not notice or would not make a competitive buying decision one way or the other.