Description
Integration, in mathematics, a fundamental concept of calculus—the operation of calculating the area between the curve of a function on the x-axis or y-axis
An Integrated Approach to Business Value Management
Quantifying and Achieving Strategic Goals
February 2011
Copyright 2011 by Point B. All rights reserved.
Topics
• Defining Business Value Realization (BVR)
• Converting Business Goals into Results
• An Integrated Approach to Business Value Management • Valuation • Putting It All Together (example)
Business Value Management
February 2011
Slide 2
Defining Business Value Realization
Business Value Realization (BVR) is the achievement of outcomes that ‘move the needle’
Business Value Management
February 2011
Slide 3
Converting Business Goals into Results
Business Value Management
Strategic Planning
Project Portfolio Management
Execution
Results
• Business Value Management - an integrated approach to quantifying and achieving strategic outcomes
• Project Portfolio Management (PPM) connects strategy to execution • Business Value Realization (BVR) is the outcome of Business Value Management
Business Value Management February 2011 Slide 4
An Integrated Approach
• Define Success
?
Create a ‘Strategy-on-a-Page’ including strategic initiatives Break down high-level goals into measurable targets over time that correlate to the initiatives Break down initiatives into a portfolio of individual projects that have specific goals aligned to desired outcomes Ensure the portfolio aligns to the risk tolerance of executives Be sure you can measure results
• Determine What to Measure
?
• Create a Roadmap and Performance Dashboard
? ? ?
• Manage the portfolio
?
Be Value Stewards by managing risk/scope/schedule
Track project outcomes to validate strategy and improve the process
Business Value Management February 2011 Slide 5
• Measure Results
?
Setting Up for Success
Strategy-on-a-Page
BVR Graphs
Initiative 1
Strategic Initiative Roadmap
Initiative 2 Initiative 3
Reward
Risk
Business Value Management
February 2011
Slide 6
Strategic Roadmapping
Goals • Support the strategy of the organization • Align departments with the link between strategy and execution by using Roadmaps and BVR graphs • For each initiative, maximize the value of the portfolio of projects by: ? Quantifying value ? Matching the risk tolerance of executives ? Optimizing resource allocation • Make the roadmap consumable by defining initiative names stakeholders can identify with
Business Value Management February 2011 Slide 7
Visualizing Risk and Reward
Portfolio Mix
(Bubbles = projects; bubble size = investment)
10 9 8 7 Reward --> 6 5 4 3 2 1 0 0 1 2 3 4 5 Risk --> 6 7 8 9 10 P3 P12 P4 P24 P10 P8 P3 P1 P7 P5 P6
P2
P9
Business Value Management
February 2011
Slide 8
The Perils of Business Case Valuation
• Types of valuation methods • Hard / soft benefits • Common issues
Business Value Management
February 2011
Slide 9
Valuation and Prioritization Methods
Ease of Use
• • • • • • •
Pair-wise Comparison Return on Investment (ROI) Break Even Time (BET) Net Present Value (NPV) Internal Rate of Return (IRR) Expected Commercial Value (ECV) Real Options
Business Value Management
February 2011
Slide 10
Pair-wise Comparison (Bubble Sort)
• Pair-wise comparison is a ranking technique for a list of projects focused on evaluating 2 projects at a time • Based on a few explicit criteria, a project is compared against another and it will either have more, less, or the same value. • Successive comparisons, each done two-at-a-time will result in a rankordered list – note that some levels will contain multiple projects if the projects within that group are indistinguishable
Business Value Management
February 2011
Slide 11
Return on Investment and Break Even Time
Benefits – Cost ROI = Cost BET: Time at which profits pay for the investment
Business Value Management
February 2011
Slide 12
NPV and IRR
• NPV and IIR are discounted cashflow methods
Cash flow (income-expenses) Discount Rate Discounted cash flow NPV 15% Investment 0 ($186,480) Period Benefit 1 2 $332,640 $332,640 0.87 $289,252 $102,772 0.76 $251,524 $354,296 3 $332,640 0.66 $218,716 $573,012
IRR - rate at which NPV = 0 in yr 3 IRRDiscount IRR Discounted cash flow NPV for IRR calc.
169% 0.37 $123,548 ($62,932) 0.14 $45,888 ($17,044) 0.05 $17,044 ($0)
• Future benefits are harder to predict than the original investment • NPV tends to result in Yes/No decision-making
Business Value Management February 2011 Slide 13
Expected Commercial Value
Expected Commercial Value (ECV)
Technical Success PTS
Yes
Commercial Success PCS
Yes
PV
Launch (C)
No
ECV
Development (D)
No
Commercial Failure Technical Failure
ECV = [ (PV*PCS – C) * PTS ] - D PTS = Probability of Technical Success PCS – Probability of Commercial Success D = Development Costs C = Launch Costs PV = Present Value
Source: Robert Cooper
Business Value Management
February 2011
Slide 14
Real Options Theory
• Project investments are treated like stock options • Decisions are made when to exercise (invest) and how much, based on a business conditions (risk assessment) • Options theory avoids the yes/no approach of NPV (or other ‘threshold’ measures), and has the benefit of better real-time risk management
Business Value Management
February 2011
Slide 15
Valuation Method Summary
• • • • • All methods require the estimation of benefits Costs are easier to estimate than benefits More advanced methods factor in risk The method of choice depends on the organization Without guidance, any method can be easily misapplied
Business Value Management
February 2011
Slide 16
Cone of Uncertainty
Source: Steve McConnell www.construx.com
Business Value Management February 2011 Slide 17
Common Pitfalls in Business Case
• Assuming the estimation of benefits and costs is accurate • The spreadsheet is the truth • Every group has its own way of determining value • Over-selling soft benefits • No compelling reason for change
Business Value Management
February 2011
Slide 18
Compelling Reason for Change
• Benefits must be compelling
? ? ?
‘Twice the speed at half the cost’ ‘Revenue increase by 25% within 6 months’ ‘Double-digit profitability’ ‘Increased productivity’ ‘Easier to use’ ‘It reduces our risk’
•
Non-compelling benefits (as stated)
? ?
?
Business Value Management
February 2011
Slide 19
Questions to Ask Regarding Benefits
• What business problem am I trying to solve? • How does my solution solve that problem? • Can I quantify and measure benefits? • How do I know? • So what? Do stakeholders care?
Business Problem Compelling Benefits Outcome
Business Value Management
February 2011
Slide 20
Types of Benefits
Hard Benefits Revenue Cost Savings Customer Satisfaction Score Process Improvement Defect rate reduction Rework time reduction Soft Benefits Productivity Ease of use Risk reduction Cost Avoidance
Common Practice: Include hard benefits in Business Case calculations, but footnote soft benefits
Business Value Management
February 2011
Slide 21
Putting It All Together - Example
• Define Success
?
Create a ‘Strategy-on-a-Page’
• Determine What to Measure
?
Break down high-level goals into measurable targets
Break down initiatives into projects that have specific goals aligned to desired outcomes Ensure the portfolio aligns to the risk tolerance of executives Be sure you can measure results
Business Value Management February 2011 Slide 22
?
Create a Roadmap and Performance Dashboard
? ? ?
Strategy-on-a-Page
Developed from material by the Balanced Scorecard Collaborative and Harvard Business Review (Kaplan & Norton)http://www.balancedscorecard.org/Portals/0/PDF/Regional_Airline.pdf
Business Value Management
February 2011
Slide 23
Setting Measurable Targets
Business Value Management
February 2011
Slide 24
Creating a Roadmap to Deliver Value
Ground Crew Training
Stock Ownership Plan
Cycle Time Optimization
Ensure each project develops clear goals that drive desired outcomes
Quality Management
Customer Loyalty
Standardize Planes
Optimize Routes
Business Value Management
February 2011
Slide 25
Assessing Risk
Ground Crew Training
Stock Ownership Plan
Cycle Time Optimization
Quality Management
Customer Loyalty
Standardize Planes
Optimize Routes
Business Value Management
February 2011
Slide 26
Measure Results
Business Value Management
February 2011
Slide 27
Summary
• Business Value Management is an integrated approach:
?
? ? ? ? ?
Align strategic goals to quantifiable outcomes Use business value targets to drive roadmaps Measure outcomes to validate strategy and process
Defining measurable initiative and project outcomes traceable to business value goals Quantifying risk / reward / investment Significant Business Value Realization is the outcome of achieving compelling benefits
Business Value Management February 2011 Slide 28
• Strategic roadmapping should include:
• Define compelling benefits
BVR In Action
Integrate Acquisitions
2002 Annual Report • We completed a multi-year project to integrate our acquisitions. • We proved the validity and viability of our business model. • We grew revenue despite a poor economy. • We improved our operating margin each quarter. • We generated significant free cash flow. 2003 Annual Report Our revenue exceeded half a billion dollars. Our operating margin reached nearly 20%. Our cash flow from operations surpassed $158 million. • We created Imagery for Creative Customers. • We expanded our Editorial leadership. • We led Film into the Digital Age. • We focused on our Distribution Strategy. 2004 Annual Report We did what we committed to do by delivering as promised against our key initiatives:
Validate Business Model
E-commerce Innovation Brand Integration
• We improved operating
margin > 25 percent • We grew the editorial business by nearly 40 percent • We launched the first fully localized e-commerce site in Japan • We committed to building new revenue streams
Generate Free Cashflow
Improve Operating Margin Photographer Contracts Expand Content Expand Editorial Film: Analog-to-Digital International Expansion New Revenue Streams
Business Value Management
February 2011
Slide 29
BVR Actuals
Business Value Management
February 2011
Slide 30
Contact Information
• For a copy of these slides or other questions, contact:
Gaylord Wahl [email protected] 206.517.2762 Kaycee Pomeroy [email protected] 206.686.7797 Jeff Jager [email protected] 206.985.9639
Business Value Management
February 2011
Slide 31
About Point B
Point B is the first professional services firm focused on project leadership and now, strategic execution. Founded in 1995, the firm provides a diverse and experienced team of locally-based project leaders to companies in Seattle, Denver, Portland, Phoenix, San Francisco, Los Angeles and Chicago. Organizations ranging in size from startups to Fortune 100 corporations turn to Point B for its ability to step into any segment or role of a mission-critical project and help lead it to success. And, unlike many professional services firms, Point B works exclusively for its clients and does not enter into alliances, reseller agreements, or other relationships that might compromise the firm's objectivity. Point B has attracted top project leaders from various industries by offering a culture that promotes flexible work schedules and well-rounded lifestyles for its more than 400 professionals. Additional information on the firm and its offerings can be viewed online athttp://www.pointb.com.
Business Value Management
February 2011
Slide 32
Appendix
Business Value Management
February 2011
Slide 33
NPV and IRR
• NPV and IIR are discounted cashflow methods using an initial investment
Investment 0 ($186,480) 15% Period Benefit 1 2 $332,640 $332,640 0.87 $289,252 $102,772 0.76 $251,524 $354,296 3 $332,640 0.66 $218,716 $573,012
Cash flow (income-expenses) Discount Rate Discounted cash flow NPV
IRR - rate at which NPV = 0 in yr 3 IRRDiscount IRR Discounted cash flow NPV for IRR calc.
169% 0.37 $123,548 ($62,932) 0.14 $45,888 ($17,044) 0.05 $17,044 ($0)
•
The discount rate (r) in the equation is based on the risk of the investment; a higher rate indicates higher risk. The minimum value of r is called the weighted-averagecost-of-capital (WACC), the rate associated with the interest rate of corporate debt. IRR is just a different variation of the equation. Investment and cashflows are held constant and r is increased until the NPV becomes 0 in the final period.
Business Value Management February 2011 Slide 34
•
doc_212741783.pdf
Integration, in mathematics, a fundamental concept of calculus—the operation of calculating the area between the curve of a function on the x-axis or y-axis
An Integrated Approach to Business Value Management
Quantifying and Achieving Strategic Goals
February 2011
Copyright 2011 by Point B. All rights reserved.
Topics
• Defining Business Value Realization (BVR)
• Converting Business Goals into Results
• An Integrated Approach to Business Value Management • Valuation • Putting It All Together (example)
Business Value Management
February 2011
Slide 2
Defining Business Value Realization
Business Value Realization (BVR) is the achievement of outcomes that ‘move the needle’
Business Value Management
February 2011
Slide 3
Converting Business Goals into Results
Business Value Management
Strategic Planning
Project Portfolio Management
Execution
Results
• Business Value Management - an integrated approach to quantifying and achieving strategic outcomes
• Project Portfolio Management (PPM) connects strategy to execution • Business Value Realization (BVR) is the outcome of Business Value Management
Business Value Management February 2011 Slide 4
An Integrated Approach
• Define Success
?
Create a ‘Strategy-on-a-Page’ including strategic initiatives Break down high-level goals into measurable targets over time that correlate to the initiatives Break down initiatives into a portfolio of individual projects that have specific goals aligned to desired outcomes Ensure the portfolio aligns to the risk tolerance of executives Be sure you can measure results
• Determine What to Measure
?
• Create a Roadmap and Performance Dashboard
? ? ?
• Manage the portfolio
?
Be Value Stewards by managing risk/scope/schedule
Track project outcomes to validate strategy and improve the process
Business Value Management February 2011 Slide 5
• Measure Results
?
Setting Up for Success
Strategy-on-a-Page
BVR Graphs
Initiative 1
Strategic Initiative Roadmap
Initiative 2 Initiative 3
Reward
Risk
Business Value Management
February 2011
Slide 6
Strategic Roadmapping
Goals • Support the strategy of the organization • Align departments with the link between strategy and execution by using Roadmaps and BVR graphs • For each initiative, maximize the value of the portfolio of projects by: ? Quantifying value ? Matching the risk tolerance of executives ? Optimizing resource allocation • Make the roadmap consumable by defining initiative names stakeholders can identify with
Business Value Management February 2011 Slide 7
Visualizing Risk and Reward
Portfolio Mix
(Bubbles = projects; bubble size = investment)
10 9 8 7 Reward --> 6 5 4 3 2 1 0 0 1 2 3 4 5 Risk --> 6 7 8 9 10 P3 P12 P4 P24 P10 P8 P3 P1 P7 P5 P6
P2
P9
Business Value Management
February 2011
Slide 8
The Perils of Business Case Valuation
• Types of valuation methods • Hard / soft benefits • Common issues
Business Value Management
February 2011
Slide 9
Valuation and Prioritization Methods
Ease of Use
• • • • • • •
Pair-wise Comparison Return on Investment (ROI) Break Even Time (BET) Net Present Value (NPV) Internal Rate of Return (IRR) Expected Commercial Value (ECV) Real Options
Business Value Management
February 2011
Slide 10
Pair-wise Comparison (Bubble Sort)
• Pair-wise comparison is a ranking technique for a list of projects focused on evaluating 2 projects at a time • Based on a few explicit criteria, a project is compared against another and it will either have more, less, or the same value. • Successive comparisons, each done two-at-a-time will result in a rankordered list – note that some levels will contain multiple projects if the projects within that group are indistinguishable
Business Value Management
February 2011
Slide 11
Return on Investment and Break Even Time
Benefits – Cost ROI = Cost BET: Time at which profits pay for the investment
Business Value Management
February 2011
Slide 12
NPV and IRR
• NPV and IIR are discounted cashflow methods
Cash flow (income-expenses) Discount Rate Discounted cash flow NPV 15% Investment 0 ($186,480) Period Benefit 1 2 $332,640 $332,640 0.87 $289,252 $102,772 0.76 $251,524 $354,296 3 $332,640 0.66 $218,716 $573,012
IRR - rate at which NPV = 0 in yr 3 IRRDiscount IRR Discounted cash flow NPV for IRR calc.
169% 0.37 $123,548 ($62,932) 0.14 $45,888 ($17,044) 0.05 $17,044 ($0)
• Future benefits are harder to predict than the original investment • NPV tends to result in Yes/No decision-making
Business Value Management February 2011 Slide 13
Expected Commercial Value
Expected Commercial Value (ECV)
Technical Success PTS
Yes
Commercial Success PCS
Yes
PV
Launch (C)
No
ECV
Development (D)
No
Commercial Failure Technical Failure
ECV = [ (PV*PCS – C) * PTS ] - D PTS = Probability of Technical Success PCS – Probability of Commercial Success D = Development Costs C = Launch Costs PV = Present Value
Source: Robert Cooper
Business Value Management
February 2011
Slide 14
Real Options Theory
• Project investments are treated like stock options • Decisions are made when to exercise (invest) and how much, based on a business conditions (risk assessment) • Options theory avoids the yes/no approach of NPV (or other ‘threshold’ measures), and has the benefit of better real-time risk management
Business Value Management
February 2011
Slide 15
Valuation Method Summary
• • • • • All methods require the estimation of benefits Costs are easier to estimate than benefits More advanced methods factor in risk The method of choice depends on the organization Without guidance, any method can be easily misapplied
Business Value Management
February 2011
Slide 16
Cone of Uncertainty
Source: Steve McConnell www.construx.com
Business Value Management February 2011 Slide 17
Common Pitfalls in Business Case
• Assuming the estimation of benefits and costs is accurate • The spreadsheet is the truth • Every group has its own way of determining value • Over-selling soft benefits • No compelling reason for change
Business Value Management
February 2011
Slide 18
Compelling Reason for Change
• Benefits must be compelling
? ? ?
‘Twice the speed at half the cost’ ‘Revenue increase by 25% within 6 months’ ‘Double-digit profitability’ ‘Increased productivity’ ‘Easier to use’ ‘It reduces our risk’
•
Non-compelling benefits (as stated)
? ?
?
Business Value Management
February 2011
Slide 19
Questions to Ask Regarding Benefits
• What business problem am I trying to solve? • How does my solution solve that problem? • Can I quantify and measure benefits? • How do I know? • So what? Do stakeholders care?
Business Problem Compelling Benefits Outcome
Business Value Management
February 2011
Slide 20
Types of Benefits
Hard Benefits Revenue Cost Savings Customer Satisfaction Score Process Improvement Defect rate reduction Rework time reduction Soft Benefits Productivity Ease of use Risk reduction Cost Avoidance
Common Practice: Include hard benefits in Business Case calculations, but footnote soft benefits
Business Value Management
February 2011
Slide 21
Putting It All Together - Example
• Define Success
?
Create a ‘Strategy-on-a-Page’
• Determine What to Measure
?
Break down high-level goals into measurable targets
Break down initiatives into projects that have specific goals aligned to desired outcomes Ensure the portfolio aligns to the risk tolerance of executives Be sure you can measure results
Business Value Management February 2011 Slide 22
?
Create a Roadmap and Performance Dashboard
? ? ?
Strategy-on-a-Page
Developed from material by the Balanced Scorecard Collaborative and Harvard Business Review (Kaplan & Norton)http://www.balancedscorecard.org/Portals/0/PDF/Regional_Airline.pdf
Business Value Management
February 2011
Slide 23
Setting Measurable Targets
Business Value Management
February 2011
Slide 24
Creating a Roadmap to Deliver Value
Ground Crew Training
Stock Ownership Plan
Cycle Time Optimization
Ensure each project develops clear goals that drive desired outcomes
Quality Management
Customer Loyalty
Standardize Planes
Optimize Routes
Business Value Management
February 2011
Slide 25
Assessing Risk
Ground Crew Training
Stock Ownership Plan
Cycle Time Optimization
Quality Management
Customer Loyalty
Standardize Planes
Optimize Routes
Business Value Management
February 2011
Slide 26
Measure Results
Business Value Management
February 2011
Slide 27
Summary
• Business Value Management is an integrated approach:
?
? ? ? ? ?
Align strategic goals to quantifiable outcomes Use business value targets to drive roadmaps Measure outcomes to validate strategy and process
Defining measurable initiative and project outcomes traceable to business value goals Quantifying risk / reward / investment Significant Business Value Realization is the outcome of achieving compelling benefits
Business Value Management February 2011 Slide 28
• Strategic roadmapping should include:
• Define compelling benefits
BVR In Action
Integrate Acquisitions
2002 Annual Report • We completed a multi-year project to integrate our acquisitions. • We proved the validity and viability of our business model. • We grew revenue despite a poor economy. • We improved our operating margin each quarter. • We generated significant free cash flow. 2003 Annual Report Our revenue exceeded half a billion dollars. Our operating margin reached nearly 20%. Our cash flow from operations surpassed $158 million. • We created Imagery for Creative Customers. • We expanded our Editorial leadership. • We led Film into the Digital Age. • We focused on our Distribution Strategy. 2004 Annual Report We did what we committed to do by delivering as promised against our key initiatives:
Validate Business Model
E-commerce Innovation Brand Integration
• We improved operating
margin > 25 percent • We grew the editorial business by nearly 40 percent • We launched the first fully localized e-commerce site in Japan • We committed to building new revenue streams
Generate Free Cashflow
Improve Operating Margin Photographer Contracts Expand Content Expand Editorial Film: Analog-to-Digital International Expansion New Revenue Streams
Business Value Management
February 2011
Slide 29
BVR Actuals
Business Value Management
February 2011
Slide 30
Contact Information
• For a copy of these slides or other questions, contact:
Gaylord Wahl [email protected] 206.517.2762 Kaycee Pomeroy [email protected] 206.686.7797 Jeff Jager [email protected] 206.985.9639
Business Value Management
February 2011
Slide 31
About Point B
Point B is the first professional services firm focused on project leadership and now, strategic execution. Founded in 1995, the firm provides a diverse and experienced team of locally-based project leaders to companies in Seattle, Denver, Portland, Phoenix, San Francisco, Los Angeles and Chicago. Organizations ranging in size from startups to Fortune 100 corporations turn to Point B for its ability to step into any segment or role of a mission-critical project and help lead it to success. And, unlike many professional services firms, Point B works exclusively for its clients and does not enter into alliances, reseller agreements, or other relationships that might compromise the firm's objectivity. Point B has attracted top project leaders from various industries by offering a culture that promotes flexible work schedules and well-rounded lifestyles for its more than 400 professionals. Additional information on the firm and its offerings can be viewed online athttp://www.pointb.com.
Business Value Management
February 2011
Slide 32
Appendix
Business Value Management
February 2011
Slide 33
NPV and IRR
• NPV and IIR are discounted cashflow methods using an initial investment
Investment 0 ($186,480) 15% Period Benefit 1 2 $332,640 $332,640 0.87 $289,252 $102,772 0.76 $251,524 $354,296 3 $332,640 0.66 $218,716 $573,012
Cash flow (income-expenses) Discount Rate Discounted cash flow NPV
IRR - rate at which NPV = 0 in yr 3 IRRDiscount IRR Discounted cash flow NPV for IRR calc.
169% 0.37 $123,548 ($62,932) 0.14 $45,888 ($17,044) 0.05 $17,044 ($0)
•
The discount rate (r) in the equation is based on the risk of the investment; a higher rate indicates higher risk. The minimum value of r is called the weighted-averagecost-of-capital (WACC), the rate associated with the interest rate of corporate debt. IRR is just a different variation of the equation. Investment and cashflows are held constant and r is increased until the NPV becomes 0 in the final period.
Business Value Management February 2011 Slide 34
•
doc_212741783.pdf