How to measure value

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After a talk the other day I at the Yow! conference, an attendee came up to ask how he could convince his management to move to an outcomes model, and how they could forecast and measure value.

Not all outcomes need to be mapped to value, but often the financial value is necessary for requesting investment in the product or service.

Step 1:
Create your Measurable Outcomes (MOs)

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Step 2:
Define Value
Value is often tricky to define. Value could be from learning a new skill, helping others, solving a problem, or a financial gain.

Financial gain typically revolves around one of three areas:

1. Increase revenue; what will be gained financially for achieving the outcome? For example, a new revenue stream gained by delivering a set of features.

2. Decrease costs; what will be saved by achieving the outcome? For example; a cost reduction initiative in operations.

3. Protected existing revenue or brand; what will be maintained or derisked by achieving the outcome? For example, improving a service so customers do not leave to go to a competing service.

Step 4:
Quantify or qualify how to measure the value

How will the value be measured? In the same way that we define the scale for measuring the outcome achieved, we define how value will be measured. For example; if the outcome was to increase conversion rates for a website, then the value might be quantified by how much each 1% conversion is worth to the company expressed annually as a monetary value.

VALUE: Each 1% conversion = 3 million dollars annually

Many times the value is linked to a higher level outcome. For example; a team might be trying to improve the page load speed for an e-commerce site, to then impact the higher level outcome of increasing conversion rates. The value will be delivered only if the conversion rates improve.

Examples

Here are some examples from different industries.

Example: Process improvement

Target outcome:
Improve time to market

Background:
The client wanted to decrease the time it took to get new products to market. During the deep dive where we mapped out the value stream to understand the steps from initial idea through to delivery, a major bottleneck was found in the final two months before release. The documentation writing was done right at the end and meant the product was stalled until this was completed. Although requests had been made for more documentation writers (or to teach other team members these skills) to work in parallel with the product teams so the work was not bottlenecked at the very end, it had not been approved. They teams were told that the cost of employing documentation writers was too expensive.

I then created a spreadsheet to show the cost of delay versus the cost of the documentation writers time. Just a disclaimer; I did this one in 10 minutes and it was done very roughly, but it was enough to get the documentation writers hired.

Value:
Each project had an average revenue projection of $3,960,000
Each week had a cost of delay of $82,500.
Each project launch had a delay of two months equalling $660,000 in lost revenue.

Cost:
A document writer had a fully burdened cost per year of $200,000.
Each document writer was assigned to six projects per year.
Each project cost $33,000 for the documentation writers time.

Comparison:
The cost to employ a documentation writer was $66,000 vs the cost of delay of $660,000. The value delivered by employing more documentation writers to work in parallel with the team rather than at the end was a gain of $594,000 per project, or $3,564,000 annually.

Example: Health care

Target outcome:
Reduce Hospital Acquired Infection rate

Value:
A 1% reduction in Hospital Acquired Infection complication rates  for Maryland in the US alone = 7 million USD annually.
A 1 point improvement in hand hygiene for a single hospital equates to $39,000 a year. Potentially $2,000,000+ savings annually.

Example: Improving time to deploy environments

Target outcome:
Improve the time to deploy environments from 6 weeks to less than 1 day, with a stretch goal of less than 15 minutes.

Background:
The product teams at an organization were complaining that it took too long to receive a development environment, which delayed their product launches. I went and spoke to the deployment group to find out what was happening. The management of the department was pleased that they had reduced the deployment down from 3 months to the current 6 weeks. I ran a value stream workshop to understand the various steps and to look for potential bottlenecks. We managed to find a series of bottlenecks that ranged from a 2 week delay, down to hours of delay.

Cost:
The costs were actually very low. Our plan iterated from the highest value items so we incrementally reduced the time to deploy quickly. One of the biggest issues was in how the details of the environment were captured. The back and forth in the ticket request created a lot of delay so simply setting up a better input template and having an environment lead spend ten minutes with the product manager shaved off many weeks. We were able to save millions of dollars within days of starting this work.

Value:
I took the projected revenue for the product launches planned that year, then multiplied it by the number of launches. There were other elements such as cost savings in hardware through to the opportunities we were able to exploit that would not have been possible otherwise.

I then divided it by the number of working weeks. It is always a good idea to review the previous years actual revenue and number of launches (this alone will usually be quite shocking as the difference between projected vs delivered is very different) to have on hand if needed. For each week you will have a cost of delay number. For a smaller organization this might be in the region of $100,000. For large companies it will be in the millions.

Total savings; For the company I was working with, the cost savings were over 100 million per year.

Example: E-commerce

Target outcome:
Improve conversion rates

Value:
A 1% improvement in conversion rates equalled 5 million per year.

Background:
The company had siloes for each piece of their conversion funnel. For example; the user would land on a marketing page that marketing had control over. They user would go through the premium services group, then to the transactions groups area. Each group had their own measures that they were being assessed on. For example, the marketing group was assessed on how many deals they managed to get the user to take up, premium services on the number of up-sells and conversions, the transactions group on how many new features they deployed etc etc. However they were sub-optimizing at the expense of the users experience and the overall metric of the number of successful conversions.

We ran a workshop and had the teams agree on the common outcome of the number of conversions. We then did a deep dive to work out what was causing the users to not complete the conversion funnel. Often management wants to know which new features will be delivered, but in reality most products and services are far less exciting and the performance improvements are where the real value is hidden.

At the end of the workshop and data gathering, it was fairly clear that we had some immediate ideas that we could test out that might deliver a lot of value rapidly. Our sub-outcomes were around improving the page load speed as we found a direct correlation between the number of drop-offs and the speed if the page took over 3-4 seconds to load. We also found a lot of usability issues that were simple to fix but had languished and in fact gotten worse as new shiny features were developed.

We started to release changes the day after the workshop. One page load speed improvement directly generated £12 million pounds in annual revenue.

Tips:

When running these sorts of numbers, it is always very helpful to have a friend in the finance department. They are usually very happy to help and interested in what the product teams are up to. I invite them along to team drinks and product review sessions so they feel part of the team. If I take my back-of-the-napkin numbers, they help me put them into a spreadsheet, check my sanity, and do their magic finance formatting to legitimize them. When I present my spreadsheets to management, I can also say that Lynn from finance has gone through and validated these numbers and is happy to provide any other information you may need and this gets me through the bureaucratic hoops smoothly.

 

 

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