PMI Global Insights

By: Michel Thiry

Making sense of value: What is value?

© Michel Thiry 2017 (with permission)

Value has become a key element of sustained competitive advantage, but not just the more traditional sense of financial or shareholder value anymore. Today’s business context requires transient strategies and successful change initiatives as an essential element of value realization. Change initiatives can include programs, projects, innovation and continuous improvement. But how can we make sense of their value for the stakeholders and measure their successful realization beyond simple financial value?

The concepts underlying value management were established by Lawrence (Larry) Miles when he developed Value Analysis and Value Engineering for General Electric in the late 1940s and early 1950s. Since then, many disciplines have stemmed from those initial concepts; for example: TQM (Total Quality Management), Lean Management, Value Management and others.

Initially, value analysis was used to reduce purchasing costs of products by finding cheaper alternatives that would perform the same functions as the original, more expensive product. In the 1960s and 70s, Value Engineers defined value as a ratio between quality and cost, and later value managers defined it as the ratio between the satisfaction of the needs of the customer and the resources used to satisfy them.

This value ratio is the basis for many business measures like the ROI (Return vs Investment); SWOT (Strengths and Weaknesses vs Opportunities and Threats); the project management’s Scope and Quality vs Time and Cost; or the program management’s Alignment vs Achievability. To make sense of value, we must examine how value can be defined and mastered in every situation.

Making sense of value

In today’s VUCA (Volatile, Uncertain, Complex and Ambiguous) context, realized organizational value can be described as the balance between the alignment of an initiative with strategic objectives, or expected benefits, and the achievability of the agreed solutions. Alignment with strategic objectives has been linked to benefits realization management and achievability can be linked to the overall risk.

To realize value for the organization, when managing a change initiative:

• Benefits must be identified, agreed upon, delivered and sustained; their alignment with strategic objectives must be clearly demonstrated.
• Overall risk must be based on the boundaries imposed on the initiative and to its level of uncertainty; the value cannot be realized without achievability.
• Value balances and integrates both concepts to give managers a means to identify the solutions that will align best with the organization’s strategy and offer the best achievability factor; I have called this: The Value Index.

The value index: How to measure value?

© Michel Thiry 2017 (with permission)

What is the value index?

Strategy developers, portfolio managers and program managers typically assess the alignment of options with the strategic objectives and compare them on that basis. A high-level risk analysis is performed to assess uncertainty and value is usually reduced to return on investment (ROI).

A true value index enables a comparison of strategic initiatives and portfolio or program components based on tangible and measurable factors. Decision-makers can compare options or rank potential initiatives on their broader value contribution by combining a measure of alignment with strategy, with a measure of achievability in a value score.

Alignment

Alignment is a measure of how well an initiative, be it a strategic initiative, a program, or a project, contributes to achieving a strategy, or adds value to the organization or its clients. A measure of the alignment requires a clear statement of the agreed initiatives’ objectives.

Typically, key stakeholders are consulted and asked to state their expectations for the initiative, which are mapped and prioritized from strategic objectives to benefits, outcomes, outputs and capabilities. This creates a benefits map or Benefits Breakdown Structure (BBS). Value Management (VM) offers creative team methods to elicit expected benefits from stakeholders and functional analysis can be used to methodically develop the BBS.

Critical Success Factors (CSFs) are then identified and weighted; they are the benefits that matter. Weighted CSFs provide the alignment target score. Each initiative is then assessed against their contribution to these weighted CSFs to provide an alignment score. The conformity to those targets will also offer an alignment monitoring measure throughout the program or project.

Achievability

Achievability is assessed against four main factors: financial, boundaries, resourcing and complexity. Each of these groups can be divided into individual measures. For example, what is the proportion of the initiative’s expected cost against the total available budget? What is the availability of the resources required to undertake this initiative? Is the expertise required to carry out that initiative sufficient? How familiar is the work that needs to be undertaken?

For all these questions, levels are set, and measures are agreed upon, like in risk analysis. Once the measures are agreed upon, each initiative’s achievability is assessed against an ideal score. The measure of achievability is a measure of the overall risk of that initiative against a series of known factors. And, the measures of achievability are also the measure of success of that initiative. It can also be used to set risk thresholds for portfolios or programs.

Calculating the value index

The value index is the combined score of alignment and achievability, where alignment is favored over achievability as it is of higher importance to value realization. The calculation of the value index offers an opportunity to negotiate the balance between available capabilities and expected benefits with the sponsors and key stakeholders.

How to balance benefits delivery with risk optimization to realize value?

© Michel Thiry 2017 (with permission)

Value realization​

Value realization is only possible if benefits are achieved; therefore, the continuous monitoring of both alignment with strategic objectives and achievability of the initiative are essential to realizing value. Value management is based on the balance of alignment and achievability and offers a robust method to combine benefits realization with risk management to ensure that initiatives undertaken will not only fulfill stakeholder’s expectations but also be realistic regarding available capabilities.

The change recipients, sponsors, program and project managers collaborate to set objectives that are agreed and achievable and align with the organization’s strategies. Typically, through creative thinking-based workshops, a value management (VM) facilitator will help elicit stakeholders’ expectations and creatively identify potential alternatives to achieve them.

• The first step of the process is based on sensemaking concepts; it allows different stakeholders with diverse perspectives to agree on a set of common objectives that can be linked to value goals.
• The second step entails the facilitation of an ideation process that consists of identifying as many potential alternatives as possible to achieve these objectives.
• Finally, in the third step, all those alternatives are assessed regarding their achievability and a choice is made on a set of options that will form the project or program.

During the performance cycle of decision management, value management will consist of monitoring benefits realization, continual risk assessment and sustaining value targets.

Benefits delivery

Sensemaking is aimed at identifying, mapping and prioritizing benefits. The output will be the benefits map and key performance indicators to measure their achievement.

In today’s VUCA context, organizations must be creative to maintain or gain a competitive edge. Ideation is a creative group process aimed at finding innovative alternatives to achieve the agreed benefits. This process enables a clear mapping of benefits to outputs.

The benefits realization management plan will combine the above elements with transition and integration support activities, their milestones and their ongoing monitoring.

Benefits realization is subjected to high ambiguity and is a creative team process.

Risk optimization

Value management must include an assessment of the probability of achieving the benefits and overall value objectives. Risk thresholds define the achievability of a change initiative; once achievability factors are defined, they are used to assess the achievability of the initiative.

When the initiative has been approved for execution, the team will perform a risk analysis that will lead to the definition of contingency reserves and risk responses. Management reserves are based on the level of achievability, or overall risk.

During execution, risk responses will be implemented, reserves managed, and achievability issues monitored. If achievability, based on the factors used to approve the initiative, is questioned, the initiative’s owner or board could challenge it.

Risk management is subjected to uncertainty and requires an analytic process.

Conclusion

As organizations operate in increasingly complex and volatile contexts, the concept of value continues to evolve. The organizations that can strike the right balance between benefits realization and risk optimization, while fostering adaptability and responsiveness, will deliver value to their stakeholders. Selecting the most innovative business initiatives, based on their alignment to the strategy and achievability, is a difficult task which the application of a value index can support.

Interested in learning more and furthering the dialogue?

Join me on 12 November 10:00 a.m. - 10:32 a.m. at the PMI^® Virtual Experience Series event for this presentation and take part in the question and answers with me and the rest of the PM community.