Value-driven digital businesses
History is full of inflection points, such as the Brexit decision in Britain or the us election in 2016. Sometimes these events are immediately seen as a historic turning point, at other times slow. One of the slow turning points, which began in early 2000, has accelerated in the past five years – from cost-driven IT to value-driven. We can also describe this turning point as a shift from efficiency to response.
In 2003, Nicholas Carr (Nicholas Carr) in the “Harvard Business Review” (Harvard Business Review) wrote an article on the controversial, titled “IT doesn’t matter”  think that IT has become a commodity, so cannot contribute to sustainable competitive advantage. Ten years later, Columbia business school professor Rita McGrath (Rita McGrath), wrote in today’s fast-paced, uncertain world, the sustainable competitive advantage itself has gone, replaced by short of competitive advantage, in this kind of competitive advantage, to learn and adapt quickly become a mark of success . In Carl’s world, technology should be considered cost. In McGrath, the response and value should push technology.
The problem is that while chief executives develop a strategy for digital businesses, their IT departments still fall into the process of developing processes, practices, and successes for cost control. In the culture of cost control, most of the investment capital is focused on accounting, reducing distribution cost and efficient manufacturing, while external customer focus is mainly afterthought. The height of this internal focus is the infatuation of business process reorganization (BPR) in the mid-1990s.
To start moving from cost-centric to value-centric, you need to start with a comprehensive discussion and measurement of value.
Wikipedia defines business value as “an informal term that includes all forms of value and determines the health and well-being of the company in the long run. Commercial value to expand the concept of enterprise value to the economy, including employee value, customer value, the value of suppliers, channel cooperation value, coalition partners value, management value and social value, and other forms of value. Many of these values are not measured in terms of money. ”
The cost is one-dimensional. It is measured in money – dollars, euros, pounds. Value is multi-dimensional. It can be quantitative, such as in terms of money or quality, such as clothing’s “chic” or “safe” cars. Many managers and administrators from cost driven culture in the aspect of qualitative value measure difficulties, therefore tend to master the quantitative measurement of activities to describe the qualitative value of what they seek. They are afraid of losing control. If value-based management is done on a long-term traditional plan and execution schedule, then this can be a problem, but it is not. The value based management model is essentially iterative and provides quick feedback to validate your decision at a faster rate. In other words, it’s more sensitive.
The value measure is more indescribable than the cost, but it is not a reason to abandon the value measure. Measuring and allocating costs, from the lowest to the highest, is relatively easy, while the value layer does not. The cost can be determined as a day’s work (8 hours x dollar/hour) or order price widgets and assigned to projects, departments or products. Costs can be divided into departments, product lines, procedures, etc. Extensive cost accounting practice is an integral part of financial management of most organizations. It’s time to pay attention to accounting.
For example, in value-driven portfolio management, you can: 1) have different value dimensions for different parts of the portfolio and 2) relative alignment of initiatives. New business initiatives may be on the customer interest on (e.g., to participate in the number of online proposal) “value”, and the traditional system upgrade may save cost or reduce to evaluate technical debt.
Of course, evaluating value with the same cost is difficult. However, once an organization commits to a value-based priority, they become creative and figure out how to implement it. You have to be skilled at finding value metrics, doing small work, and often using data science. Moreover, fuzzy measurements of important things are better than accurate measurements of unimportant things.
Business revenue and customer value
Another aspect of value analysis is that it is highly advantageous to the enterprise – separating customer values (external) from commercial value (internal). It is very important to separate these concepts, and we have begun to use the word value for customer value, and the term “benefit” is used for internal business value. For example, let’s say your company sells outdoor equipment. Benefit oriented may be the result of the “customer sales increase hiking shoes”, and the results of the customer value is likely to be “in the outdoor, all weather and terrain conditions, in a comfortable, stable and hiking on style”.
You can assume a range of value “measures” from activities to business interests to customer values. Clearly, customer value metrics are the most useful, and activity metrics are the least useful for describing the expected results. Unfortunately, many organizations use activity metrics (for example, software development rates or number of marketing impressions) that are rarely associated with value. It’s like measuring the speed of typing to measure the author’s value. It is not easy to cross this series of measures. It is not straightforward, but it is necessary to build a value-driven organization.
We believe that successful measures should be as customer-oriented as possible. One of the benefits of describing value in this way is that you first think about the problem from the customer’s perspective. First consider how to increase sales, not how to provide value to customers. It is more likely to assume that the increase in customer value will generate commercial interests than the higher customer value of business interests first. Value, using this definition, helps us focus on external customer experiences rather than internal benefits. The more we can understand what constitutes a good customer experience, the more likely we are to create value for our customers and benefit our business. Take outdoor equipment companies for example,
An example of internal/external focus differences appears in interface design. As any a long plagued the inner system of a “user” will complain about IT, “the application of the user experience is really awful, but we have no choice, we must use IT to us.” External users are completely different – designing a poor customer experience, they just go somewhere else.
Potholes and traps
Over the past decade, there has been a growing interest in value management, especially in lean and agile communities. Lean practices, such as value diagrams, highlight activities that increase value and non-value. Agile developers have developed practices that measure different types of values and assign these values to a continuous smaller increment from business and customer results to a single software feature.
However, many organizations do not understand the profound changes required for external technical operations, which are based on cost and internally focused IT shifts to more value. Planning and strategy need to change. Organizational structure needs to change. Technology delivery practices need to change. Portfolio management needs to change. Successful measures need to change. Shifting from cost-driven to value-driven culture is much more difficult than first appearing. It’s not cost control that doesn’t matter, it’s just that it’s not the most important – it’s not the main goal.
As with any new method, remember the hole and the trap when making the transition.
Learning and planning
In the theory of complexity there is a concept called the edge of chaos. This “edge” is random and structured, and is where the maximum learning creates an environment for innovation. Balancing this edge requires everyone to work in a more chaotic, exciting field where uncertainty is accepted and the solution may be short-lived. This is not a safe place, but it is where the organization invented the future.
In the past, a plan of regulation was necessary. Today, that is not enough, and may even be dangerous. Planning is important, of course, and you need to envision a future state. But, for planning, you need a different attitude – a way to make frequent, sometimes significant, changes as part of learning. Jim has labeled this approach as a Envision-Evolve instead of plan-do. This Envision-Evolve cycle is characterized by shortening the initial period (we will correct later), proposing successful measures to enhance learning, and using the rapid iterative learning cycle. Traditional method of plan – there is usually a long planning cycle and a long period, to minimize the chance of change the plan as far as possible, even can prevent team members to correct mistakes, even if it is reasonable. In the Envision-Evolve method,
A problem with cost-driven culture, especially in today’s turbulent world, is that they tend to change slowly. They are not completely unchanged, but the planned change is limited to small “adjustments”. On the other hand, value-driven culture is designed to enable it to work in significant ways when necessary and to be implemented quickly. Cost-oriented cultures tend to be determination-like “planning work, making plans”. Value-driven culture constantly asks – does another direction improve our value delivery?
Portfolio management: promoting innovation
Between strategy and execution are downstream funds. Traditional portfolio management processes try to predict future investment returns based on planned plans. There is no question of using ROI when appropriate. But there are other measures that can better inform decision-making. To promote innovation, portfolio priorities need to be based on a value creation hypothesis and a successful measurement of customer value. In this way, we move from predictive value to exploration of maximum value.
What we need is a more dynamic portfolio management approach that can be managed quickly and easily, managed through collaborative decisions, iterations and value drivers. We should be driven by the next most valuable initiative, not the “plan” initiative 18 months ago. Many companies have clarified a reasonable future digital strategy, but their allocation of funds does not reflect new strategies. Politics and the old process often frustrate the best strategy. Many of the “agile” extension frameworks continue these traditional approaches.