IIRMFW : Exec’s & Business Value

The IT Investment Risk Management Framework is the set of constraints that development organisations need to operate within in order for the associated risks to be managed appropriately.

The executives in an organisation have a responsibility to rhe investors when managing the risk surrounding the delivery of Business Value.

Executives responsibility for Business Value Metrics

The key metric that an executive is responsible for is:

  • The percentage of the IT Investment Portfolio that can demonstrate whether an investment generated a return.

There are two sub-metrics beneath this metric for the executive.

  • The percentage of IT Investments that are linked to a metric. i.e. Has the product owner stated the metric that will improve as a result of an investment (e.g. Story, Epic, Initiative).
  • The percentage of metrics that can be displayed. i.e. Is the metric available in a format that the improvement in the metric can be demonstrated. Note that the metric might be manually captured.

In effect the executive should be able to observe a graph for each metric that is similar to the one below:

Screen Shot 2016-05-30 at 10.30.53

as well as a summary of investments that looks like the following:

MetricAllocation

In the event that a metric is not available to be displayed, the executive should be committed to delivery of that metric within an appropriate time frame.

Risks Being Managed

These key metrics demonstrate that the executive is managing key business value risks. The risks managed are as follows:

The percentage of the IT Investment Portfolio that can demonstrate whether an investment generated a return. – This metric ensures that the executive has transparency into whether a return is being delivered by their portfolio of investments. The exact return delivered by a particular investment may be difficult to assess however the impact of the portfolio investment is transparent. It is not necessary to specify that the executive checks the return regularly as the metrics graph provide transparency that is not enhanced by taking minutes of metric review meetings. However, it is to the executives benefit to be on top of their metrics by reviewing them regularly so that they can intervene in a timely manner. A failure to intervene would be evidence that the executive is not performing their role properly.

The percentage of IT Investments that are linked to a metric. – This metric ensures that everyone in the executives organisation is focused on delivering value rather than functionality. It provides transparency on those that cannot prove they intend to deliver value (no metric assigned). This transparency also allows the executive to take a portfolio view and rebalance the portfolio if appropriate.

The percentage of metrics that can be displayed. – This metric indicates where a return can and cannot be demonstrated. If the return cannot be demonstrated, there is a massive risk that an investment might deliver no return ir even worse destroy value.

The Business Value Metrics Framework

All metrics should be part of an organisation wide standardised metrics framework. This has two benefits:

  • The standard framework makes it easier for product owners to identify the value they are delivering because they do not have to work it out for themselves.
  • The standard framework makes it easier to compare the value of disparate investments.

The business value metrics framework should be “open sourced” within the organisation with a product owner facilitating the addition and modification of metrics, and the decisions regarding the additions and modifications being made by the Business Value Metrics Steering Committee. The Business Value Metrics Steering Committee should be appointed by the board as the definition of business value in an organisation is key to its success.

A business value metrics framework is vital when an organisation relies on third party consultants to write business cases as there is a substantial conflict of interest. For example, there is a tendency to suggest attributes of a product as business value (e.g. Lead time) rather than business value (Conversion Rate). Product attributes are easy to deliver compared to those that depend on the needs of the customer and the market.

The Business Value Metrics Framework can be constructed using “Break the Model”. Identify an example (Tea Bag), Reflect if it is in-scope, Create an Example (Tea Bag -> Cup of Tea -> User Need -> Business Value) and then Model (Add it to the Hierarchy). The product owner performs this process based on the examples that are presented to them as not fitting in the model.

The Business Value Metrics Framework will probably map to your organisations Business Model. e.g. Freemium = Get users, Increase Activity, Get Revenue. Traditional = Get Revenue, Increase Activity, Prevent Churn.

Risk Adjusted Return on Capital is a good starting point.

  • Risk
    • Investment Lead Time (Weighted Lead Time)
      • Key Man Dependencies
    • Quality
      • ITIL measures
      • Failure Demand
    • Employee Happiness
      • Turnover
  • Revenue
    • ARPU (Average Revenue Per User)
    • Activity (Average Visits per Month)
    • Number of Customers
      • New Customers
        • Conversion Rate
        • Customers into the Funnel
      • Churn
  • Costs
    • ACPU (Average Cost Per User)
      • People Costs
      • Overheads

Disruptive Innovation versus Efficiency Innovation

The executive should ensure that the portfolio has the appropriate levels of Disruptive, Sustaining and Efficiency Innovation. Otherwise the organisation might discover its market being disrupted. Check out Clayton Christensen’s lecture for more details.

* The concept of the Business Value Cascade was created by Mark Gillett, Senior Vice President at Microsoft, responsible for Skype & Lync products. The first analysis and implementation was performed by Keith Beatie, now a partner at McKinsey.

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About theitriskmanager

A IT programme manager specialising in delivering trading and risk management systems in Investment Banks. I achieve this by focusing on risk rather than cost. A focus on costs can lead to increased costs. View all posts by theitriskmanager

6 responses to “IIRMFW : Exec’s & Business Value

  • Mark Gillett (@magillett)

    Chris (and Tony), I appreciate the hat-tip here. The heavy lifting was done by the broader team (some great folks!) – my conviction continues to grow (5 years on) that the structured, inverted, tree of measures (Value Cascade) is central foundation for agile, data-driven decision making.

    A key build, I’d propose thinking clearly about where such a tool is owned. Success depends on clear ownership by the ‘top team’ and I’d counsel against a ‘steering committee’ as the value in this kind of tool lies in changing day-to-day behavior and so its much more powerful implemented through line management style structures over project management style structures.

    • theitriskmanager

      Hi Mark, I completely agree. I think a Value Cascade is vital for scaling Agile. Without it, you have no agreed definition of value and gaming will result in a failure to deliver true value.

      Thank you for the build on the steering committee. My intent was that the value cascade is owned by the executive committee but managed by experts who can tell the difference between value and product/organisational attributes. e.g. Page load times are known to impact conversion rate so there is a temptation to use them as value metrics. The value metric is conversion rate. Page load time is a product attribute. We were extremely fortunate at Skype to have an executive who had a clear understanding of value. Since then, I’ve often seen product attributes (e.g. lead time) accepted as business value.

  • KentMcDonald

    Chris, it seems like your suggestions for metrics are a great way to change the discussion on metrics and focus them on useful questions. Great idea.

    I find that I’m having trouble connecting the example graph and the summary of investments to those three metrics. Could you expand on that a little bit more to help me make the connection. I’m trying to make sure I understand the idea so I can figure out if it is applicable to my situation, and if so, how to apply it or modify it so that it may be more applicable.

    Also, I’m trying to figure out how the bulleted items near the bottom of the article relate to the rest. Are these intended to be possible ways to measure/monitor Risk, Revenue, and Cost?

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