Even having an astonishing and marvelous idea, in the business area, someone will finally ask: “Will it pay off?” Most economic assessment methods require specific information on the estimated income and costs. As long as we solve a complicated problem with a low level of ambiguity, we can develop a detailed plan and an accurate cost estimation. But how do we decide on the project undertaking if we don’t know yet what the final product will look like and what resources we need for the execution?
Artykuł sponsorowanyWhen Henry Ford introduced an assembly line in 1913, he expected the employees to carry the small, simple pieces of the production process. In those days, most potential employees were uneducated and had no particular qualifications to deliver complex tasks. He used to say, “Nothing is particularly hard if you divide it into small jobs.” Nowadays, most of these tasks are overtaken by robots. Machines assemble and weld the elements at production sites, and at offices, we use programs to automate repetitive tasks. In most cases, we are overqualified to perform them personally. Fortunately, due to technological progress and the complexity of the contemporary world, there are much more complicated challenges which fulfill our ambitions.
Fot. phonlamaiphoto – stock.adobe.comIt’s not that easy any more
The complication of the worldwide system we function in and a high dynamic of changes lead to ambiguity. Each event may have unexpected causes that you may be unable to foresee. The bankruptcy of your biggest competitor, which you would find favorable, may cause your common supplier to have too few orders to operate, which puts you in trouble as well. What is a fundamental truth today may be a false concept tomorrow. Thus, in many cases, we cannot make a detailed plan for a long-term investment as it is already outdated when completed. Planning a shopping mall construction, which is to end in 4 years, should I spend my time designing each tile? Before the actual construction, the specific model manufacture can be suspended, or the trends can change so that the design becomes outdated and needs a rework.
Reaching the market before it changes
Therefore we started to split the work into smaller pieces. We moved from a long-term perspective to yearly, monthly, or even weekly intervals of design and delivery, which best makes sense in the specific case. We are shortening the time to market as much as possible to minimize the probability that our market had changed before we reached it. At the same time, we maximize the chance that our Minimum Loveable Product is still loveable! We plan as late as possible to capture the predictable horizon and meet the most up-to-date customer needs with the specific functionalities of our product.
Plan as we go
In fact, we start to plan during the project execution, an example of which might be the approaches that include inspect and adapt, backlog refinement, or rolling-wave planning. We start the projects knowing that we want to meet customers’ needs, but we don’t know yet how exactly we will do that or how the final product will look. If we don’t know what we are to deliver with a project, we don’t know how much it will cost. Therefore, how should we assess if something will generate a positive cash flow?
Is it worth doing?
The first question we should answer is if the project we are considering is worth undertaking by our organization. But what does it actually mean? Should I just prepare a cost-benefit analysis? Not exactly. Each company is set up for a purpose. The founders usually start with the vision of how the organization will look in the future, how it will influence its environment, what may concern the business, social or ecological aspects. This vision should be shared, understood, and strengthened organization-wide. Usually, it is supported by a plan presenting our goals for the next few years, bringing us closer to our shared vision, our North Star. This plan is called Strategy. The primary objective of the company is to strive to reach the vision. Therefore you may need to start a project which is an enabler required to meet the strategic goal even if its rentability is poor. For example, if the company is meant to be climate-friendly and its strategic objective is to become climate neutral, it may decide to start to buy green energy, which is usually more expensive. It will not necessarily pay off, but it will definitely be worth doing.
Fot. Richelle – stock.adobe.comWork backwards
We know we should not start with the money, so what to start with assessing the idea? Start from the end. Take a mental journey to the future when your project is finished, and the product has reached the market. Take a piece of paper and wonder how your customers will react to the product. How will it be helpful for them, and which of their problems will it resolve. What is going to be changed in their behavior? Describe the after-launch state. Then, try to think out what the frequently asked questions will be. Put the shoes of different stakeholders. Take an external perspective of a customer who may be interested in how much the product cost, where it can be bought, whether it has a specific function, or why it is better than some other products or services on the market? Take a few questions and set the first version of an external Frequently Asked Questions (FAQ). Now let’s consider what questions you may receive from the internal stakeholders. Those questions may oscillate around why we should take on this project as a company as well as how the product development or maintenance will look.
Fot. Jon Anders Wiken – stock.adobe.cDon’t let your perspective limit you!
Thinking about the customer needs, in most cases, we do it through the prism of our own experience. Unfortunately, what you find as an issue for most of your company customers may not be an issue at all. The strategic objective your idea is going to support may be already supported by some other, more lucrative initiatives which you are not aware of. That is why you need to share your idea with the organization and discuss it. Start the consultations as soon as possible. Spending weeks developing an idea limited only to your own perspective doesn’t make sense. Preparation of the material for the first discussions should take about an hour – this is the whole time you sacrifice if the idea’s basic assumptions are obsolete.
Idea development
Some of the discussions may end up with the conclusion that this product is not actually what we should be doing as the organization, it is not in line with our strategy, it will not enable the organization to serve the customers in the way it is envisioned, or some is simply already doing this kind of project. This is fine! You have spent only an hour preparing a document and made a few meetings to develop your perspective and identify that it is not worth undertaking for the organization. On the other hand, after the first consultation with your close cooperators, when it’s clear that the idea supports the company goals, this is probably worth doing! Each meeting may provide a different view on the specific product aspects and customer needs. After the meeting, you will probably need to prepare the next version of your document, which will be adjusted by new important questions and which will identify customer needs more and more accurately. Avoid making complex and complicated material. The document should present only the key needs of the customers which will be met, not all of the needs.
Fot. fizkes – stock.adobe.comCost-Benefit Analysis
Consulting your document wider in the organization, you will finally get asked about the financials. As already said, there is limited data the estimations can be based on at this point. Take your document and meet with a development team. The discussion should bring you not only additional perspective, but you should be able to jointly assess what kind of skills and talents the project execution will require and how long it may take. Find a few people matching the skill sets in the organization and verify the estimations with them. Then head to the HR department and collect the data on the required talent rates. In the IT environment, in most cases, at this point you will have a scrum team composition identified with a range of sprint counts it will take to develop the product. The rates from HR enable us to estimate the cost of 1 sprint, which, together with the sprint counts range, will provide the range of project costs.
What to do with the cost-benefit ranges?
The estimation of profits is usually more straightforward. In most cases, it results from the service/product price and the quantity of goods sold. In the first iterations of your document, your assumption may be general but as your idea is getting consulted with Middle and Top management, this is the right moment to increase the accuracy of the initial estimations. Look for information on the sale of similar products, or products hitting the same market or target group. You may need to perform a survey to hear the voice of the customer on how much they are willing to pay for your product or service. This analysis may result in an exact number or range, as well as in the case of the costs. What number should be considered in the CBA? How to compare the projects with ranges? You may present your idea differently, but all the ideas must present the data similarly, so it is comparable. For some managers, ordering ideas by specific numbers will be easier. Others will appreciate the information about the project’s minimum and maximum estimated value to understand how risk may influence the project value.
3-points method
Talking with the teams about the estimated time of delivery and costs, you should probably be able to characterize 3 parameters: how fast the product may be developed by the assumed team, how long it will most-probably take, and what is the maximum in which the development should be finished even some of the foreseeable risks materialize. In effect, you get optimistic, realistic, and pessimistic variants of the costs. Take the research and identify the same for the benefits. The costs and benefits will bring information on the profit and value of the project in different scenarios but which one to use to make decisions. It will depend on the executives. Some of them will ask for the pessimistic, others only for realistic values, and others will be looking for the projects that may bring the highest potential upside, so they will focus on the optimistic value. An option to consider all the variants in 1 value is the 3-points method. Take the pessimistic value, add a realistic value multiplied by 4, then add the optimistic one. Take the sum and divide it by 6. This is nothing more than the weighted average, which enables you to consider all the variants presenting 1 final value. You may adjust the weights to the actual organization’s risk appetite, increasing the meaning of the optimistic or pessimistic variants.
Reach the decision-maker when you’re ready!
During the idea development, you will start to consult it higher in the organization as long as you finally reach a go/no go decision maker. There are different ideas, and depending on the scale, level of influence on the organization and its business, the decision may even require the CEO’s involvement. At this point, they should have all the necessary data to decide if the idea is worth doing or if further idea exploration is worth granting a separate budget.
Fot. Who is Danny – stock.adobe.comYou don’t need a “go” decision to succeed
The described process may end up on different organizational levels with “to go” or “not to go” decisions. This is the objective of the presented approach, which means that if you reach the decision, you succeed independently of what kind of decision it is. We all have a lot of ideas, but only a few are worth executing. That is why the decision to abandon the idea is more likely to happen and should not be taken personally. It should be threatened as an act of a responsible, data-driven decision on the explored idea and as an opportunity to start the discovery of another undertaking.
[ENG] Portfolio Management Expert with a long-term experience in global organizations running the projects on 4 continents. A subject matter expert in Portfolio Governance Model Design and Implementation, which enables the organization to focus the resources and talents on development towards the organization vision. Uses his knowledge and experience to continuously increase the organization efficiency. He supports the organization from the Bottom to the Top in jointly achieving the company’s strategic goals.
[PL] Ekspert Portfolio Management z wieloletnim stażem w globalnych organizacjach realizujących projekty na 4 kontynentach. Mimo że dołączył do Allegro z początkiem tego roku świetnie odnajduje się w portfelu polskiego giganta e-commerce. Wnosi świeże spojrzenie i nie boi się zadawać trudnych pytań. Dzięki swojej wiedzy i doświadczeniu sukcesywnie pracuje nad zwiększeniem efektywności organizacji poprzez realizację inicjatyw zorientowanych na wsparcie jej celów strategicznych. Pomimo wcześniejszych doświadczeń w dużo większych organizacjach widać, że jest w nim startupowy duch Allegro!