Whenever I hear "we need to focus on value over cost and schedule," it tells me that only ½ the equation of business success is understood.
Absolutely value is needed and is the focus of our work efforts. No customer is going to pay for a product or service that doesn't have the needed value. This value is usually in a unit of measure around a "capability" to do something for the that in turn solves a problem, generates revenue, enables another process to function.
No customer is going to want that value if it is not affordable. So along with the Value, we need to know the cost to achieve that value.
So along with the Value, we need to know the cost to achieve that value.
But Value also needs Measures of Effectiveness to get the job done. Measures of Performance while getting the job done. The Technical Performance Measures of the underlying hardware, software, people processes that enable the job to get done at the right cost. Rarely if ever are these measures discussed. Without them the term value has no unit of measure. And without a unit of measure, there is no way to compare different values while comparing different costs and schedules to achieve that value.
This is the fundamental flaw of #Noestimates. Value, Cost, and Schedule, are random variables. Estimates are needed before work starts to determine of that value is worth delivering for the estimated cost at the estimated time. This is fundamental business management, which it appears #Noestimates ignores.
But this value is an enabler. The units of measure of the value are defined by the customer, not the provider. The Marketing department of the provider may have suggestions about the value of the product or service, but it is the customer that confirms that value.
In doing the confirmation of Value, the buyer (internal or external customer) makes this assessment using the foundational principles of all business decisions in the presence of uncertainty...
Microeconomics
Microeconomics is a branch of economics that studies the behavior of individuals and small impacted organizations in making decisions on the allocation of limited resources. Those limited resources to the buyer are:
- Time - the need for the capability provided by the Value produced by the developer usually has a time frame on it. If that Value could arrive anytime, then it is unlikely the Value of the Value is very high.
- Money - the other limited resource is money. How much does the Value cost?
The time value of money is then used by the buyer to enable another decision-making process
ROI = (Value - Cost ) / Cost
So when we hear, we don't need to know the cost, that is we don't need to estimate the cots of producing the value, think again. This can only be true if the delivered value takes place in the presence of unlimited resources. That is we have all the time we need and no one really cares about the cost. That is the principle of microeconomics of business decision making is not in play.
As a final point. Budget is NOT Cost. Setting the budget, only sets the budget. The cost of the work is called Actual Cost and the actual cost is generated by exchanging labor and materials for money. So setting the budget is needed. But setting the budget only says what the expected cost might be. If you're given a budget and an expected set of Value outcomes, estimates of the confidence of delivering that Value will be needed. Otherwise, your budget is just a number, that will easily be blown before you deliver the needed capabilities on the needed date.
If asked what should our budget be for the expected Value, then solving the ROI or Expected Monetary Value, or Value at Risk needs to take place. In order to do this for a decision about the future ROI, EMV, or VAR, we need to estimate both the Cost and Value - then manage the project that produces the Capabilities that deliver the Value toward both those cost and time variables. And of course, those variables are random variables.
When it is stated in a workshop where the participants will learn about
- Decision-making frameworks for the project that don't require estimates.
- Investment models for the software project that don't require estimates.
- Project management (risk management, scope management, process reports) approaches that don't require estimates.
Then those processes are not operating in a governance domain where microeconomics of product developments are in place. Can't say where they are operating, but it's not on this planet of a for-profit business. Or those proffering this approach have discovered a secret sauce that gets around the basic principles of all business -
Profit = Revenue - Cost of Goods Sold
The only place I know this principle is not in place, is here in Colorado, just outside of Fairplay, CO, in South Park. This is the actual home of Trey Parker and Matt Stone. They attended CU (University of Colorado, Boulder) in our home town. This is the South Park Bowl, where much of the action takes place. It's a Real place, unlike focusing on Value rather than on time and cost. All three need to be understood to make the analysis of alternatives needed to decide what is actually of value in the presence of uncertainty since all three are random variables draw from a population of many possible values.
Here in South Park, the local businessmen have a clever plan to get rich without being subject to the principles microeconomics of making decisions in the presence of uncertainty about how to do that.
