How to Measure Business Value

We’re often asked the question “How do I quantify value?”

For many businesses this is a matter of balancing risks against (Estimated Sales – Cost of Development).

It is the quantification of the risk element that poses a problem, but if the potential reward significantly outweighs the cost to develop then the decision to proceed is at the discretion of a Business Leader and can be judged based on the risk vs. outcome value.

For non-profit based organisations the financial element is eliminated and it seems as if it is impossible to place a value on the product, however, value does not always equate to a purely financial gain.

We have considered many approaches to identification of value and always return to the work of Akao and MIzuno for a starting point, Akao and Mizuno defined the following as tests of value.

Value is recognized when Business Customers or Product Customers perceive one or more of the following:
  • A problem of theirs is solved or minimized
  • An opportunity they desire is seized, maximized or enabled
  • That they “look good” to significant others
  • That they “feel good” about themselves

We have applied the above statements to many different scenarios in the public and private sectors and they always provide a way to consider whether any endeavour is providing value for its customers. The decision to proceed is again at the discretion and judgement of a Business Leader based on the risk vs. outcome value.

Value for the Customer, not part of the business.

It is important to remember that Value should only be defined from the end customer’s point of view of specific products and specific outcomes.

Value cannot be determined by intermediate stages in a value stream, only end consumers of a product/service can truly indicate value. This causes difficulties in large organisations where products and services are created and supported by large numbers of teams, many of these teams work in an environment that precludes direct contact with their consumers. In these situations it is very difficult to quantify the value of a product or service as the team in question only sees the boundaries of their particular sphere of influence, this means that they treat the downstream recipient of their part of the value stream as their “customer”. The follow-on team is simply part of the value stream and is a recipient of another team’s contribution to the product.

Focusing on the sub-parts of a value stream prevents true identification of Business Value and will lead to local optimisation of the sub-processes involved in product delivery, often local optimisation has a detrimental impact on the flow of the whole value stream.

To avoid this we advise examination of entire value streams with the perception of value to be taken from the end customers’ perspective.

Understanding Value is the foundation of Lean principles and key to understanding why and how anything is done in a business.

The Point

A project team must be able to identify and articulate the value it delivers if this cannot be done the project should simply be stopped.