Adding business value – focus on delivering what our organisations really need

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Jun 27th, 2010

I’ve recently been exploring the meaning of business value with colleagues over at the Agile Analysis discussion group. What is business value? Why do we need to know? How do we know when we’ve delivered it?

The discussion started with a definition of business value as “something that increases revenue, protects revenue, or reduces costs —  based on the work of Chris Matts and Anthony Marcano.

While this provides a firm basis for assessing whether any proposed business changes will add business value, it is solely focused on money so might lead to short-term thinking and would not work as well for non-commercial organisations, i.e. governmental and charitable.

Dennis Stevens suggested including “position the organisation for the future” as a way of building value for the longer term, which definitely adds a good perspective — although this can be interpreted as simply building something now to deliver some other meaning of value later.

Ellen Gottesdiener went on to propose adding “improve service, meet regulatory requirements, and marketing” to build a rounder perspective.

This intrigued me. How could we expand this definition to work for governmental and charitable organisations too, based on experience working in these sectors rather than theorising? And just what do we mean by business value when we use the term.

Business Value

To understand what we mean by the term business value, it’s worth looking at what we mean by value in the first place.

In this context, value is something that is delivered or realised by activities we undertake. In value chain theory, this could be the outcomes from a lean value-driven process. But this definition starts to get self-referencing — defining something by using the word you’re defining is like saying ‘blue is a shade of blue’ — so we need to stop and think about what we mean by value.

What is value?

Value is a quality in something that makes it desirable. According to value theory, value can be imbued with obligations (what people are expected to deliver), worth (what people will pay for it), and satisfaction (how people feel about it) — and should be assessed from both the provider and receiver perspectives.

What is value to organisations?

The first value that an organisation should recognise and strive for is that for which they were founded — their prime directive — this will vary from organisation to organisation, but can be summarised at a high level according to the sector in which they are active — commercial, governmental, and charity (firstly from a long-term view):

Commercial organisations: return a dividend for their shareholders and grow the long-term net worth.

Government organisations: meet their statutory obligations. NB: This is also a factor for commercial and charity organisations, but not primary.

Charity organisations: work toward their founding principles — put poor children through college, support professional development, eradicate malaria, improve the health of sex workers, whatever.

For organisations that face customers (arguably all, to one extent or another) it will also be about maintaining appropriate levels of service. For commercial organisations — customer service that delights; for government organisation — meeting their citizens’ expectations; for charity organisations — keeping them alive (for example).

In the short-term, however, sometimes these long-term objectives are often overridden or modified.

Commercial organisations will sometimes engage in pricing policies that squeeze their margin (profit) — for example, in an attempt to force a competitor out of business — most business thinkers agree that this is a no-win game, but many organisations still feel obliged to do it at times.

Governmental organisations will sometimes deliberately adopt policies that will disenfranchise or disadvantage some, because political policy has been changed and they are obliged to implement it even when it appears to be at odds with their remit — so statutory obligation can override service commitments.

Charity organisations will sometimes stop providing their services in certain locations because it is unsafe for their staff/volunteers — so the wellbeing of their staff can override their founding principles.

A working definition of business value

Achieving or delivering value can be any one of the following — and depending on the type of organisation, the balance of each of these will vary (i.e. whether they are primary or secondary drivers):

  • Reduce/avoid cost
  • Maintain/protect revenue
  • Increase revenue
  • Meet statutory and other obligations
  • Strive for appropriate levels of service
  • Protect and develop staff

All of this the better to achieve their prime directive (whatever that might be).

As I review this list now, it bears a striking resemblance to the four classes of benefits/value from benefits mapping and the balanced scorecard — financial, customer, staff, and operational.

So turning that around, I would like to propose a definition…

Business Value is anything that contributes to an organisation’s stated primary goals, e.g. increase or protect revenue, reduce/avoid costs, improve service, meet regulatory/social obligations, achieve market strategy, and develop staff.

  • Organisation’s stated primary goals: all organisations should have a clearly articulated statement about why they exist and how they define success (i.e. the vision, mission, and goals statement); everything that is claimed as business value should be directly attributable to the organisation’s stated primary goals; if a project doesn’t deliver something that contributes toward one of those it doesn’t have a sound business case.

The following are examples of goals that could be important to any organisation; the precise mix will depend on the type of organisation and the sector within which they operate (commercial, governmental, or charitable/volunteer):

  • Increase revenue: make more money, raise more taxes, increase sponsorship/donations
  • Protect revenue: retain customers, fight off competition
  • Avoid/reduce costs: streamline operations, operational efficiencies in the value stream, better links with suppliers
  • Improve service: ensure that products and services meet the needs of real customers, enable a service experience that meets expectations or even delights
  • Meet regulatory/social obligations: do the right thing legally, environmentally, and socially, protecting the company from risk of fines, bad press, or losing key leadership — also encompasses corporate social responsibility (CSR)
  • Achieve market strategy: build brand recognition and market share, enter new markets, implement good product development roadmap
  • Develop staff: recruit and retain the best people, train and develop them to be the best they can be, support them with appropriate remuneration and benefits

For those that are keen on mnemonics to remember definitions, this could be abbreviated as:

  • OG IR PR AC IS MO MS DS

for which picture an ogre practising on his mother’s Nintendo DS.

Honourable mentions

The following have also contributed to the recent discussions on this: Prashant GandhiShane Hastie, and Kent McDonald.

3 Comments

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