Easy Classification of Business Value for Portfolio Management

Whether you’re a Product Owner in an IT organization or a Product Manager in an ISV organization, you’re competing for scarce resources.  If you can’t quickly communicate the value of the work you’re proposing, you may lose out!  But if you can, you’ll stay in the game and ultimately obtain the funding that will put or keep your product on the road to success. Here’s a tool to help easily classify and communicate business value for consideration in Product and Program Portfolio Management.

The basis for this view of business value comes from my good friend and colleague Gudrun Granholm at BoxOne Financials.  Gudrun teaches managers a model that aligns Operations with Finance and with strategy.  She divides the organization’s Income Statement into three boxes:Box1 model

Box 1:  Gross Profit.  This box Includes both Revenue and the Cost of Delivery (also called Cost of Goods Sold).

Box 2:  Operating Income.  This box reflects the expenses required to keep the business running, and nets them out against Gross Profit. We’ll focus on the “Cost of Operations” subtotal for this article.

Box 3:  Net income.  Includes income and expenses not directly related to running the business: for example,  interest income and expense, and income taxes.

Nearly all management decisions about software products and applications impact Boxes 1 and 2, so that’s where we’ll focus our discussion.  And further, I’d like to break Box 1 into its specific Revenue and Cost of Delivery components, as strategy often focuses on one over the other.  This gives us three distinct types of business value to work with:  increasing Revenues, decreasing Cost of Delivery, and decreasing Cost of Operations.

It’s more important than ever to understand where the major product or application investments you’re considering impact the business.  With Agile methods taking hold and providing increased productivity, we want to make sure that Development teams are working on the projects that provide the most value to the organization.

Prior to the web, it could be argued that most internal IT efforts were focused on reducing Cost of Operations or Cost of Delivery via automation.  But with so many businesses now selling online, IT teams are now very involved in supporting Revenue streams.  More than just making sure that there’s a shopping cart function, IT teams are improving product search functions, optimizing purchase paths, and creating mobile applications to promote consumer engagement and influence brand preference.  In ISV organizations, Product Managers are focused on creating the products and services that fuel Box 1 Revenues, often with little regard to Costs of Delivery or Operations.

So here’s a simple two-step process for classifying and communicating business value. First, work with your business stakeholders to identify  which Box or Boxes  your proposed investment will impact.

Then, check alignment with corporate or business unit strategy.  Strategic objectives often focus on Box 1 Revenue or Cost of Delivery impact, or Box 2 efficiencies.  If your proposed investment has significant impact in an area that corporate strategy is focused on, then you’ll have a stronger chance of gaining support as portfolio decisions are made.

Here’s how to use this information at the portfolio level.
  • During the first screening of proposals, “strategic alignment” is often one of the key filters.  Using the Box 1 or Box 2 designation will help make this filter more concrete.  Note that you don’t need quantification at this stage – simply identifying which Box in the model, and whether Revenue or Delivery Costs in Box 1 will be impacted, is enough.  If a proposal impacts more than one type of value, there may be an opportunity to break the proposal into smaller efforts by focusing on a single type of value.
  • During annual planning, Development spending can be bucketed so that all three areas have some funds allocated.  This enables technical debt and architectural concerns to be addressed in parallel with new products and new functionality.
  • During business case development, estimate the amount of proposed business value to be delivered in Box 1 and/or Box 2. This information will provide quantified input to WSJF or similar scoring methods.
And here’s how to use this information as a Product Manager or Product Owner.
  • The more value you can deliver in Box 1, the bigger impact you can have on the business.  Box 2 efficiencies are more valued in mature industries and organizations where Box 1 Revenue growth and Cost of Delivery efficiencies have already been maximized.
  • In commercial software, it’s important that you watch market growth patterns.  Use a model like the Boston Consulting Group Growth-Share Matrix to understand when your market growth slows and you should shift your investment from Revenue and market share growth to Delivery and Operational efficiency.  Be certain to explain this shift when you present your roadmaps and investment proposals.  Your goal is to maximize your product’s profit contribution.

Using this easy “shorthand” for communicating business value will bring consistency to the conversation, and help decision-makers quickly and accurately determine the which proposals should move forward on a fast track.

 

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