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Chapter 8 of Value Management (978-1-4094-0955-7) by Roger H. Davies and Adam J. Davies

Aligning Value

CHAPTER 8

Objectives

After reading this chapter you will be able to:

  • Define business alignment and programme value alignment

  • Align objectives and measures throughout the business by cascading the Balanced Scorecard and extending themes through these levels

  • Define which combination of programme deliverables offers the greatest value using value magnitude alignment

  • Structure and sequence programme phases in order to deliver this value most quickly with least risk using value timing alignment

  • Combine magnitude and timing components of alignment into an implementation strategy which optimises overall programme value

 

Precision Question

What is the optimum business and programme alignment that delivers greatest value, most quickly at acceptable risk?

What is Value Alignment?

Value alignment refers to the state in which all levels of the business, together with programmes, are focused on and working directly towards a common vision. Value alignment is required to operate in the two dimensions that we introduced in the last chapter, magnitude and timing, to ensure that the maximum overall value is realised. There are two aspects to value alignment:

  1. business alignment

  2. programme value alignment

 

Business alignment refers to convergence of objectives and measures at all levels within the organisation, providing a clear line of sight on the vision from any viewpoint. Programme value alignment is concerned with directing this business convergence to programmes, which are optimised for realising the greatest benefits most quickly at least cost and acceptable risk. The two aspects of value alignment work in unison. Business alignment provides the essential business environment within which stakeholder value can be most readily created, the key output from which is a cascaded and aligned Balanced Scorecard. Programme value alignment ensures that programmes deliver the full potential value in the shortest time and with least risk, through an implementation strategy.

Business Alignment

Thus far we have considered the Balanced Scorecard in the context of the highest level in the business. This is important because the Balanced Scorecard is developed around the strategy for delivering the vision, defined as themes, which connect objectives and measures in the strategy map. This level was also used to develop the corresponding cause and effect map and dynamics model.

However, to be truly effective it is necessary to propagate the Balanced Scorecard throughout the business, ensuring that performance measures align with themes in the strategy map. Niven1 [29] concludes that, if implemented effectively, cascading may pay the biggest dividends of all. A Balanced Scorecard, or any performance management framework, should be holographic in nature, whereby from any point in the business there are clear objectives, precise measures and causal threads which lead to the vision. Consequently, the strategy map should be represented at all levels within the business, providing an unambiguous line of sight, through the objectives and measures to the vision. This leads us to the challenge of cascading the Balanced Scorecard through the various levels in the business. There are essentially two ways in which this can be done, and these are combined in Value Management to provide the broadest possible picture of the business:

  1. hierarchical cascade

  2. causal cascade

 

Hierarchical Cascade

Typically, in a hierarchically cascaded Balanced Scorecard, measures at the highest level are designated KPIs, to denote their strategic significance. The KPIs are then broken down into one or more lower levels of Performance Indicators (PIs), which often reflect the organisational structure of the organisation. For example, the Balanced Scorecard used to manage IT outsourcing within a UK motoring organisation followed a cascade which reflected the different services. So, the customer perspective had an objective, maintain high availability, with two underlying KPI measures, system availability and application availability. The KPIs were then decomposed into PIs covering the availability of the specific applications. The significance of each application was reflected in the weightings leading to the KPI scores. A hierarchical cascade is shown in Figure 8.1.

 
Figure 8.1 Hierarchical Balanced Scorecard cascade

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This approach is generally the most intuitive to implement because the cascade mirrors the organisation. It is also important for management purposes. For example, a department manager needs to know how all the areas within their responsibility are performing, how these compare and link their performance to personal Balanced Scorecards for individuals. Ultimately, individual performance is reflected in the staff appraisal regime.

However, this structure has two limitations. First, it promotes the presupposition that measures are also hierarchical in status, that is, KPIs are more important than PIs, and the lower the level, the less important a measure is. In Value Management, higher-level measures are simply nearer to the intended outcome, but not necessarily more important. As the law of leverage dictates, lower-level measures can not only have effects which are completely disproportionate to their apparent status, but are generally at the point of power where actual changes are initiated.

Secondly, the structure imposes the same constraint that we discuss when we consider Business Intelligence (BI) solutions in Appendix B ; the vertical drill and roll up does not necessarily reflect true cross-functional causality. The best way to explain this is through the ‘So what?’ test, stated as, ‘So what effect will there be in one or more strategic outcomes as a direct result of a given change in a departmental or individual measure?’

It is usually difficult to give a precise answer to this question because the hierarchical and causal links are not the same.

Causal Cascade

In a causal cascade structure, Balanced Scorecards are developed for different levels and follow the themes, so that every objective and measure has a direct cause and effect connection to strategic outcomes. In effect, the strategy map is extended throughout the business. Themes are mapped through all levels, providing a clear line of sight from each measure to the vision, as shown in Figure 8.2.

 
Figure 8.2 Causal Balanced Scorecard cascade

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There are four key observations from Figure 8.2. First, the themes do not necessarily follow the same perspectives and/or objectives. In this example, an objective in the customer perspective at the operational level feeds into a different objective in the resources perspective at the management level. Secondly, the theme contains only those specific measures for each objective in the chain that actually contribute to the theme’s strategic outcomes. For example, an objective may have five measures but only two of these contribute to the specific theme. Thirdly, programme deliverables (denoted by the triangles) are mapped against measures, to provide a complete picture of how the theme’s strategic outcomes will be achieved. Finally, driver and benefit owners (denoted by the heads) are also defined for the theme, remembering that the owner of a driver at a point of power at the operational level can have the greatest overall influence on the outcomes.

The degree of specificity in the linkage between measures is derived from the cause and effect map and dynamics model, and it is important that these are synchronised with the Balanced Scorecard. More specifically, by ensuring consistency between the Balanced Scorecard and dynamics model, we can use the former to assess past and present performance and apply the latter to make future predictions, incorporating necessary corrective action. This is covered in Appendix C . Figure 8.3 shows the causal connections between specific measures in the theme, as they would appear in the cause and effect map, and quantified in the dynamics model.

 
Figure 8.3 Causal map and model – Balanced Scorecard synchronisation

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Programme Value Alignment

The vision is caused through business capabilities enabled by programme deliverables; remembering that deliverables are provided by business as usual as well as by major change initiatives. Therefore, the focus in Value Management is to drive the vision and maximise overall value by aligning programme deliverables in both magnitude and time. In the last chapter we introduced the distinction between functional and value dependence in relation to programme design and implementation. Functional dependence refers to operational relationships between deliverables. For example, a brick wall cannot be built until the foundations are completed. Value dependence involves a strategy by which phases are structured and sequenced to deliver the greatest value. For example, we build the houses that represent the greatest realisable value first. In Value Management, we maximise the overall value of the programme by optimising value dependence whist respecting essential functional dependence. This process is called programme value alignment and the key output is an implementation strategy.

Programme Value Alignment Road map

It is appropriate to review how we have reached the point where we can achieve programme value alignment. In Chapter 5 we defined the vision and mapped deliverables against specific objectives needed to achieve the vision. In Chapter 6 we identified the highest leverage through which change can be effected and mapped the deliverables to specific drivers. In Chapter 7 we attributed financial benefits to deliverables and assigned benefits, together with development and support costs, to major programme phases. This enabled us to quantify cash flows and gave us an initial DCF analysis.

Now, we consider how to structure and sequence the programme phases that output deliverables in order to maximise benefits and overall value. We achieve this by reordering, decomposing, and/or redefining phases to output whole or partial deliverables, and aligning them into an implementation strategy which maximises programme value, taking into account risk, always within the context of the vision.

Programme value is expressed as a DCF J-curve, which quantifies the difference between programme benefits and costs adjusted for the time value of money. The J-curve is driven by both the magnitude and timing of programme costs and benefits. Value magnitude is concerned with the size of programme benefits and costs, whilst timing relates to how they are phased within the programme. Therefore, an implementation strategy maximises overall value by optimising the magnitude and timing of value attributable to programme phases. A road map for developing an implementation strategy is shown in Figure 8.4 and demonstrated in the next case study.

 
Figure 8.4 Programme value alignment road map

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The New Banking Product Story

A major UK bank owned one of the largest high street networks and market share for retail business. However, it had a comparatively smaller share of the business banking market and was undertaking an urgent strategy to raise its profile to be within the top five in the UK. In addition to introducing new business banking products, the bank wanted to exploit its branch network to cross-sell existing products, currently sold centrally. The most important of these was Invoice Discounting (ID), which involved the bank managing payment of supplier invoices on behalf of clients, mainly small and medium-sized enterprises (SME).

A programme team was assigned with a brief to introduce ID into the branch network as a matter of urgency. The team identified three key deliverables within the programme:

  • Branch electronic network: installing a dedicated electronic network across the branches to enable automation of the service

  • Process changes: essential process changes within branch operations to facilitate the new product

  • Product sales skills: capability of branch staff to cross-sell ID to both new and existing customers

 

The initial business case was based on a programme plan comprising three projects, mirroring the deliverables, sequenced in typical functional dependence as shown in a simplified version in Figure 8.5.

Although the NPV was positive, after analysing the results the programme team made several observations relating to delivered value. First, there was minimal concurrent working between phases, rendering the programme inherently long. Secondly, no benefits were realised until the entire programme was completed, concluding with the product sales training. Thirdly, because the most expensive phase, branch electronic network, was implemented first, the programme incurred high early negative cash flows.

 
Figure 8.5 Functional dependence

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We refer to this dependence as functional because the links are driven purely by the intuitive operational order in which the outputs are implemented. In this case, process changes would naturally be implemented after the technology is available and training would only be done when everything else is completed, so that new practices are started whilst they are fresh in peoples’ minds. The team then considered how the programme design could be changed in order deliver optimum value, using value alignment.

Value Magnitude Alignment

Value magnitude alignment targets the greatest potential size of programme benefits, in relation to programme costs, and is achieved in two ways, referring to Figure 8.4:

  1. capability scope

  2. business scope

 

Capability Scope

Capability scope is the degree to which capabilities, enabled by each deliverable, are implemented in terms of value. In the new product case study, it was possible to introduce a semi-automated version of ID with limited capabilities. This was an example of capability scope. It is important to quantify phase costs and benefits separately, in order to compute the value of each option, as illustrated in the following examples:

  • Phase costs: measured as the proportion of development and support costs that would be incurred for full implementation. For example, development of the semi-automated ID was approximately 40 per cent of the cost of a fully functional version.

  • Phase benefits: measured as the proportion of maximum periodic, for example annual, benefits attributable to the deliverable. For example, the semi-automated ID represented approximately 60 per cent of the annual benefits attributable to ID implemented with full capabilities.

 

Capability scope refers to the proportion of full capability enabled by deliverables that is implemented within a given part of the business, in terms of value.

Business Scope

Business scope refers to the degree to which capabilities are implemented within the business and customer base, in terms of value. In the new product case study, it also made sense to limit implementation of the semi-automated version of ID within carefully selected branches. This was an example of business scope. Business scope is measured in the same way as for capability scope. For example, operating within selected branches represented 30 per cent of the cost of rollout across the entire branch network, whilst representing 50 per cent of potential business customer value.

Business scope is the degree to which capability is implemented within the business, in terms of value.

Business scope operates in two dimensions, as shown in Figure 8.6:

  1. business level scope

  2. business lateral scope

 

Business level scope is concerned with the hierarchical position within the business at which the capability is implemented. When considering level in Value Management, we make a distinction between status and causal influence. Status relates to the level of authority and organisation, for example, whether capabilities are deployed at operational, tactical or strategic levels in the business. Causal influence is less obvious; it refers to the degree of leverage that a capability has on value outcomes, completely irrespective of the formal hierarchical or process location. Sometimes status and causal influence are the same. For example, a strategic BI solution can only be used effectively at the point where there is sufficient authority to act on the insights that it exposes.

 
Figure 8.6 Business scope

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However, this is not always the case. For example, in defence electronics manufacturing, components are sourced, stored and scheduled using Enterprise Resource Planning (ERP) and directed into kits comprising all the parts needed to complete a particular sub-assembly at the appropriate build stage. However, when parts are missing, automation is overridden by progress chasers, called expeditors in the US, who rob full but lower-priority kits to replace missing components on higher-priority work. Because ERP systems are very sensitive to the accuracy of inventory, this practice soon undermines the integrity of the entire manufacturing process. In this case, seemingly innocuous actions at the operational level can have profound effects on the entire business. Lateral scope is concerned with the degree to which change is implemented across the business at the appropriate levels.

Watzlawick et al.2 [30] articulated the need to determine the appropriate level for dealing with a problem, as to whether we need revolution or evolution. In systemic terms, revolution involves changing the structure of a problem, for example, major shifts in polices, organisation or processes, whereas evolution adjusts the elements working within the overall structure. The penalty of getting this wrong can be severe. For example, repeatedly changing managers of underperforming departments without resolving a fundamental flaw in the business will not only fail to solve the issue, but impose the cost of change and resentment. Conversely, poor productivity within an otherwise efficient and fair process does not call for a new company-wide policy on diversity, which might be effective in the former case, but just some strong local management. Reframing, chunking and the Meta Model, discussed in Chapter 3, provide powerful tools for tackling this challenge.

Capability and business scope can be combined in terms of both programme costs and benefits, to deliver maximum value. For example, the benefits for introducing semi-automatic ID in the selected branches was 60% × 50% = 30% of the fully functional product operating in all branches. The cost was 40% × 30% = 12%. In other words, by focusing on 12 per cent of the final programme costs it was possible to return 30 per cent of the benefits. As in this case, even modest early returns can have a significant effect on the NPV due to the time value of money. What we looking for in value magnitude alignment are ‘sweet spots’ where the meeting of deliverables and business drivers present the most leverage to create value. This is shown in Figure 8.7.

 
Figure 8.7 Value magnitude alignment

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Value Timing Alignment

Whilst magnitude alignment maximises the potential size of programme value, timing alignment is concerned with realising this value most quickly with least risk. Value timing alignment is achieved in two ways, referring to Figure 8.4:

  1. phase structure

  2. phase sequence

 

Phase Structure

Phase structure relates to how value attributable to deliverables is distributed across phases. There are several ways in which this can be done. First, we can structure phases to output more than one whole or partial deliverable, as shown in Figure 8.8.

 
Figure 8.8 Phase structure – multiple deliverables per phase

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In this case, rather than each phase outputting a single deliverable, as in the initial structure, phases are designed to result in benefits attributable to more than one partial deliverable. The specific part of each deliverable to be output would be selected as a result of value magnitude alignment and reference to benefits profiles covered in the previous chapter.

Sometimes, we need to be even more precise in determining when benefits attributable to each partial deliverable will be realised. To achieve this level of definition, we can decompose larger phases into to a greater number of smaller phases for each deliverable, as shown in Figure 8.9.

 
Figure 8.9 Phase structure – multiple phases per deliverable

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The difference between these examples is that by using multiple, more precisely defined phases we have realised some benefits earlier, resulting in a significantly more favourable NPV J-curve. We can combine the approaches to produce an increasingly more defined delivery profile. It is important to stress that in all cases, the proportions shown against each phase represents the benefits attributable to each phase, which may be different from either the proportion of cost or operational implementation.

Phase Sequence

Phase sequence refers to how programme phases are ordered to deliver value most quickly. This aspect covers both the order in which phases are arranged, taking into account functional dependencies, and concurrence, that is the level of parallel working between phases. For example, in the new product case study, the team initially restructured the programme in three key ways. First, the programme was shortened by introducing greater concurrence between the three projects. Secondly, the minimum essential process changes were implemented as soon as functionally possible, enabling branches to sell ID sooner, albeit with some manual intervention, in a number of carefully selected branches.

Although the semi-automated version was less attractive and more costly to operate, early benefits provided a ‘quick win’. Thirdly, the most expensive phase, branch electronic network, was sequenced later in the programme, taking pressure off early negative cash flows, as well as reducing the overall operational risk. The resulting NPV, shown in Figure 8.10, was greatly increased from the initial structure in Figure 8.5.

 
Figure 8.10 Phase sequence

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The early negative cash flows increased because the work was front loaded. However, this was more than compensated by benefits which accrued much earlier through the introduction of a manual version of the product, rather than waiting until completion of the electronic network enabled full automation.

Programme Value Dynamics

As we have shown in Chapter 7 and the above examples, programme costs and benefits behave in very different ways. We now need to consider how these differences are critical to programme design from value and risk perspectives. The first essential difference is that for each phase, development costs are incurred before any deliverables are output and support costs subsequently expended. Conversely, for benefits to be realised, deliverables must not only be output but also operationally effective. Secondly, whereas costs are generally incurred in full as resources are consumed, irrespective of whether any benefits are achieved, benefits tend to build up to a maximum over time. For example, CRM requires significant up-front investment, but will not generate additional revenue streams until the customer knowledge has accumulated to the point where it can be used effectively to match value propositions with customers.

A key implication of the dynamics of programme costs and benefits is that the odds are stacked against delivering intended value. More frequently, costs escalate and benefits are reduced through the manifestation of risk: the J-curve takes a hike to the right and falls over. However, this common pattern can be greatly mitigated through value alignment and careful programme design reflected in an implementation strategy.

Integrating Quick Returns with Sustainability

This brings us to the need to integrate early returns with long-term sustainability. One of the most effective ways to increase the programme NPV is to bring forward whole or partial deliverables that result in significant early benefits. Applied wisely, this approach can also reduce risk in three ways. First, realising benefits early not only improves the NPV, due to the time value of money, but also means that whatever happens later these benefits are not lost, as would be the case if all benefits were dependent on a big bang delivery later in the programme life. Secondly, early benefits can fund subsequent development. Thirdly, early implementation can be used to eliminate functional and organisational risks by ironing out problems, proving success and reducing resistance to change. The practical means by which this integration is achieved is by implementing Proof of Concept (PoC) solutions, which deliver early returns and reduce risk, prior to full implementation. We discuss the use of PoC in Appendix C .

The key to maximising value whilst minimising risk is to integrate quick returns with long term sustainability, made possible through value alignment.

Implementation Strategy

Value magnitude and timing alignment are combined to produce an implementation strategy which optimises value by outputting precisely targeted, timed and aligned deliverables. An implementation strategy aligns both the magnitude and timing of benefits to maximise the overall value of the programme, taking into account risk. A simplified version of the final implementation strategy for the new banking product case study is shown in Figure 8.11.

An implementation strategy maximises programme value by targeting, timing and aligning deliverables.

 
Figure 8.11 Implementation strategy

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The new product implementation strategy applied both magnitude and timing alignment. The semi-automated ID product was rolled out to selected branches; examples of capability and business scope respectively. The process and training elements were duly decomposed into smaller, more precisely defined phases, an example of phase structure using multiple phases. Finally, phase sequencing was used by ordering the phases to deliver early positive cash flows from the semi-automated ID, prior to full implementation after completion of the branch electronic network.

The implementation strategy forms the basis for a baseline business case and value realisation plan, the two key tools for approving and tracking the programme. However, before we produce these documents we need to be certain that intended value will be delivered. This is the subject of the next chapter.

Essence

The principal learning from this chapter is summarised below:

  • Value alignment refers to the state in which all levels of the business, together with programmes, are focused on and working directly towards a common vision

  • Business alignment refers to convergence of objectives and measures at all levels within the organisation, providing a clear line of sight on the vision from any viewpoint

  • Programme value alignment is concerned with directing this business convergence to programmes, which are optimised for realising greatest benefits most quickly at least cost and acceptable risk

  • Programme value alignment is expressed in terms of the magnitude and timing of value which is delivered through programme design

  • Value magnitude alignment is concerned with quantifying elements of capability and parts of the business which represent greatest value for implementation

  • Value timing alignment determines how phases are structured and sequenced in order to deliver greatest value, most quickly with least risk

  • Magnitude and timing value alignment are combined into an implementation strategy which optimises the programme by value delivery

 

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