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:

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

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.