Value is in the eye of the stakeholder

The only purpose of undertaking any business activity is to create value! If undertaking the work destroys value the activity should not be started.

The Value Chain

The Value Chain

Any value proposition though is ‘in the eye of the stakeholder’ – this is rarely solely constrained by either time or cost. Effective value management requires an understanding of what is valuable to the organisation and the activity to create value should be focused on successfully delivering the anticipated value.

The chain of work starts with a project or similar activity initiated to create a new product, service or result. However, the new output by itself cannot deliver a benefit to the organisation and the project manager cannot be held responsible for the creation of value. The organisation’s management has to make effective use of the output to realise a benefit. It is the organisations management that manages the organisation and these people need to change the way the organisation works to realize the intended benefit. The role of the project team in value creation is to ensure their output has all of the necessary characteristics and components to allow the organisation to easily adopt the ‘new output’ into it’s overall way of working (eg, effective training materials).

The outcome from making effective use of the output is expected to create a benefit – however to realise a benefit, the outcome needs to support a strategic objective of the organisation. If the outcome is in conflict with the organisations strategy, value can still be destroyed. Strategic alignment is not an afterthought! The processes to initiate the project should have as a basic consideration its alignment with the organisations strategic objectives.

Assuming strategic alignment is achieved, the realised benefits should translate into real value. The challenge is often quantifying value – the concept of ‘value drivers’ helps. Value drivers allow the benefit to be quantified either financially or by other less tangible means.

In the current economic climate, organisations are finding operating capital in short supply. Therefore a new process to accelerate the billing cycle can be measured at several levels:

  • The output from the activity to develop the new billing process is simply the new process – this has no value.
  • Once the organisations management starts using the new process the measurable outcome is a reduction in the billing cycle from (say) 45 days to 32 days.
  • The benefit of this reduction in the billing cycle could be a reduction in operating capital needs of $500,000.
  • The value of this reduction is $500,000 at 12% interest = $60,000 per annum.
    The above example may also trigger additional value by allowing the capital to be redeployed into another profit generating activity, improving customer relationships, etc.

Once the whole organisation is aware of the value proposition, decisions to de-scope the initial work to meet time constraints and/or cost constraints can be made sensibly.

  • A decision to de-scope the project to achieve a 2 week saving in time that results in a 6 week longer implementation period (eg, by reducing training development) is clearly counterproductive.
  • Similarly a decision to de-scope the project to avoid a $5,000 cost overrun that changes the reduction in the billing cycle time from 13 days to 6 days will result in a halving of the capital saving and a cost increase to the organisation of $30,000.

The challenge is identifying and communicating the value drivers to all levels of management involved in the activity so that valuable decisions are made in preference to knee jerk gut reactions focused on short term, easy to measure metrics. Value is created by meeting the strategic needs of the organisation’s stakeholders – this requires careful analysis and understanding of who they are and what are their real requirements; ie, effective stakeholder management.

For more ideas on the realisation of value, see the work by Jed Simms at: http://www.valuedeliverymanagement.com/

For more on effective stakeholder management see: http://www.stakeholder-management.com

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10 responses to “Value is in the eye of the stakeholder

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  3. Hello!
    Very Interesting post! Thank you for such interesting resource!
    PS: Sorry for my bad english, I’v just started to learn this language 😉
    See you!
    Your, Raiul Baztepo

  4. I liked the summary, but along the way I thought you might want to rephrase this statement – “however to realise a benefit, the outcome needs to support a strategic objective of the organisation.”

    For most organizations, the outcome has to generate a profit to product a benefit for the company. Whether the profit is consistent with, predicted by, or totally blind-sides the original strategic plan is in someways irrelevant. Most business run on profit, not strategy. Your thoughts?

    Rodney Brim,
    http://www.managepro.com/blog

  5. Probably more than half the reason the world is in its current financial mess is the short term focus on value = profit. Certainly every organisation needs to operate efficiently and in the commercial sector this equates to profitably but it is totally false to assume every project should generate a short term ‘profit’.

    Most strategic developments including R&D, entering new markets and restructuring operations cost money. There is a negative return in the short term however, these projects are also critically important for the long term survival of the organisation. You only have to compare GM and Toyota to see how critical this is – GM did not invest in the strategic development of fuel efficient cars, it concentrated on short term profits and its then popular range of SUV gas guzzlers. Toyota has been investing in economically viable cars for more than a decade. Both businesses are losing $100 millions in the current recession but which one is likely to be best placed for the 2010 car market? The VALUE of Toyota’s investment in hybrid cars is in securing its long term future as a vehicle manufacturer in a world where the price of petrol steadily increases and consumers become ever more environmentally aware. GM made a short term profit last year.

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