It's a popular phrase in the agile community to speak about value. And to use this notion as the basis of decision making around tools, processes, and delivered software.
Trouble is when we hear words like estimates provide no value, build the most valuable piece first, and other fully buzz word compliant phrases, there is rarely a foundation for how to define Value, how to Measure Value, and most of all how to produce the best value in the presence of all the uncertainties that impact the project or product.
A value proposition is the sum of the benefits a customer receives in return for the payment made to produce those benefits.
To increase the value proposition for a product or outcomes of a project, we must either reduce the cost to produce those outcomes or increase the benefits to the customer.
There are well-known ways to reduce the cost of producing the outcome:
- Utilize economies of scale and scope to spread
fixed costs over a greater number of units - Application of a learning curve to reduce
variable costs by doing the same thing
repetitively - Smooth the supply chain to lower vendor costs
- Reduce inventory costs
- Reduce or manage complexity in the system
There are several ways to increase the benefit to the customer:
- Increase the flexibility (scope or number of potential applications) of the product to allow the product to meet a wider variety of customer needs.
- Increase flexibility to allow the customer to utilize the product to respond to uncertainty or changes in threats or opportunities.
- Increasing the number of modules or configurations to increase the options to incorporate innovations.
Now for the Real Problem
Every one of these choices and actions operates in the presence of uncertainty that creates a risk to the success of the value proposition. The first uncertainty is Reducible (Epistemic) which can be handled with buy down activities. Building prototypes, redundancy, alternative usage, and other approaches that provide the needed knowledge to reduce the Epistemic uncertainty creating the risk.
The second uncertainty is Irreducible (Aleatory) and can only be handled with margin. Cost margin, schedule margin, technical performance margin.
In both cases making decisions in the presence of these uncertainties about increasing the Customer Benefit and the Cost to produce that customer, benefit means we have to estimate the Benefit and the Cost.
In the presence of uncertainty, no credible decision about the customer benefit or cost to produce that benefit is possible
It is a fallacy that such decisions can be made. It is a fallacy that those paying have no need for those spending to NOT Estimate.
† Economics of Strategy, Sixth Edition, David Besamko, David Dranove, Mark Shanley, and Scott Schaefer, Wiley, 2013.
