Creating and Capturing Value – Far more than reducing costs
The fast-changing VUCA (volatile, uncertain, complex, ambiguous) world is forcing leaders to consider different approaches to running their organisations. More than ever, leaders are under pressure to reduce cost, increase efficiency, and sustain relevance. The commercial incentive to achieve greater and sustainable business value from planned investments and operations is significant.
Research from the Project Management Institute (PMI) and the Economist Intelligence Unit suggests that there is huge waste in strategy setting and in strategy implementation. There is a myriad of reasons why, with many associated with poor dialogue and decision making around value creation and capture.
What is Value?
The term ‘value’ in any organisation needs to be determined, defined, and used in statements that set the cultural tone and working style of the organisation. Think purpose statement, strategic goals, and business objectives. To me organizational value can be defined as:
‘The perceived benefit, tangible or intangible, to stakeholders’.
Following the determination of value, control is managed via a value management framework anchored around four themes:
- Value to customers
- Value to staff and brand
- Monetary value
- Strategic value
Within those themes four types of value need to be considered and planned for across any organization’s short and mid-term activity. The value types (inherent, added, innovative, new) are then collated and balanced across all operational expenditure (OpEx) and capital expenditure (capex) investments.
What is Value Management?
Value management (VM) is not the same as value engineering (VE). VM focuses on organizational objectives, whereas VE typically focuses on the objectives of approved initiatives. VM encompasses the overall and strategic process of optimizing investment, its function, and its return. It utilizes sub-processes such as value planning, value engineering, value delivery and value capture to achieve that.
Figure 1 shows a VM framework and life cycle:
Figure 1: The Value Management Framework & Life Cycle
Decisions that have the greatest influence on value generally occur at the early stages of any initiative. However, elements of value management can be applied during the complete life cycle of an investment.
These decisions, together with the related conversations, need to be well informed, objective and, if necessary, challenged. Those are done together by using a value management framework.
Value Management Framework
For a value management initiative to be sustainable it requires a framework that allows for value strategy, planning, engineering, delivery and capture to be governed and deployed in a manner that is efficient, effective, and easily understood by all involved. This framework is applied at the commencement of value creation (strategic) dialogue and advances through the phases of implementation so that value is confirmed.
The value management framework could include classic tools and techniques such as value planning, value engineering, and earned value management. The following provides a little insight to each of the five value themes.
1. Value Management Strategy
In order to fully optimize benefits, an organization seeking to use value management must have a solid strategy around its definition and its deployment. This would also include having a reasonably mature level of portfolio management that supports option taking and decision making around strategic goals and business objectives. A value management strategy should determine the policy that devises a structured value management approach to ensure that maximum value is captured from every investment.
However, this alone may not provide clear benefit if it is not embedded with other key strategic approaches. The existence of an EPMO (enterprise portfolio management office) with a mature view of portfolio management would include VM as one of its key approaches. When these two approaches are integrated, significant gain should be available to the organization.
Figure 2 reflects a model of integrating value management with portfolio management:
Figure 2: Value Management in a Portfolio Management Environment
When integrated with portfolio management, value management provides a mechanism for key decisions to be made from rational, objective, and accountable conversations and considerations. These decisions aim to achieve optimal value creation from the delivered functions at the least cost whilst meeting quality and other objectives.
2. Value Planning (VP)
VP is the approach used to plan and balance value creation. This balance is across the four types of value (i.e., inherent, added, innovative, and now). VP should allow for periodic assessments/reviews so that planned value is protected and confirmed during the value delivery and capture periods.
VP activity must be managed well, with an emphasis on the front end of portfolio management. Typically, a consultative or collaborative approach would be adopted with critique being done via value workshops. Various options would be considered in a VP workshop and agreed-upon criteria compared against one another to allow selection decisions to be made in much the same way as portfolio planning is done. Those decisions would then provide key input into retrospective business cases and work authorization control mechanisms.
Outputs from the VP stage would include content for use in portfolios. It is the VP activity that bridges the void between the desired business objectives of the organization and the content of portfolios of work that’s to be done to achieve those objectives. An aligned implementation of the strategy if you prefer!
3. Value Engineering (VE)
VE provides a framework to ensure that necessary functions are achieved for optimal cost without detriment to the quality, performance, delivery, and maintenance of the defined VE is typically done once VP is complete and should focus on developing selected options and targeted outputs further within each business case constraint.
The objective of any VE activity is to identify and consider alternatives, analyse those, and select a best value-for-money solution (all whilst keeping the overall business case parameters intact). Note though that best value-for-money does not mean the lowest cost in terms of capex or OpEx investments.
VE is often done via a series of workshops that aim to seek out as many alternatives as possible, analyse those and select a preferred option using agreed criteria that satisfy the planned output required. Risk and opportunity management would normally be done in parallel with this.
VE is normally quite specific in its focus and therefore tends to consider effects on cost, time, risk, and quality associated with producing the output plus operation and other life cycle costs for a ‘whole of life’ view. It is sensible to including supply chain inputs into VE workshops; especially if members of the supply chain provide specialist products or services that are to be incorporated into the chosen solution.
4. Value delivery (VD)
VD is inherent within program of work or specific project delivery. Output from VE workshops sets the scope baseline for the program of work or project. Further change may take place during the VD stage, and classic change control methods are utilized to protect value that was locked in when the project was approved.
However, the ability to influence or increase value within the delivery cycle reduces with each successive stage of the VM cycle, similar to the elements of risk and opportunity, i.e., the closer to the delivery point for outputs, the harder it is to influence or increase value.
The note of caution here is that proposed changes to scope during the delivery period require careful analysis that must include a focus on the operational and life cycle impacts rather than just the focus on cost, time and scope that is so often applied.
5. Value capture (VC)
VC can be thought of as a mature form of benefits realization in that after the delivery of each initiative (program of work or a specific project), value is gathered. In a VM environment, value can be gained during the VD stage as well as the VC stage.
Often, value has a progressive aspect that sees it accumulating as the later stages of each VM life cycle are completed. In some cases, the full value may not be achieved until well after the delivery of program- of-work or project outputs. Therefore, the actual benefits to be gained require careful thought and need to have well-defined and agreed-upon metrics.
It is quite conceivable that an EPMO or even PMO could provide a VC service to the organization – so long as the EPMO is at a level of maturity where it operates at a true portfolio management level and is staffed by people that have high levels of capability and competence.
A final report should be prepared toward the end of the VC period. It should capture relevant information that can be used to affirm the planned value is fully achieved. This report can also incorporate other content that would provide quality data for use in future strategic and portfolio planning.
Value Management Summary
The next few years will introduce significant change in areas of geo-politics, technology, environmental, and social well-being that will likely have considerable impact on all organisations. A value management framework used in conjunction with portfolio management will add a great deal of certainty to any series of planned investments (portfolios).
Value management needs a mature approach and an integrated one to be sustainable. It incorporates techniques such as strategic business planning, sensitivity analysis, investment logic mapping, program/project delivery and benefits realisation.
Value management then becomes a complete mechanism that will give leaders confidence in investment decisions of any size. It does this by dovetailing portfolio management into “how we do business”, blending OpEx and capex investments into a more holistic and efficient approach. It should also provide greater confidence in responding to the market mantras of ‘doing more for less’ and ‘faster, better, cheaper’.
- Economist Intelligence Unit. (2013). Why good strategies fail: lessons from the c-suite. London, The Economist Intelligence Unit.
- Iain Fraser (2017). The Business of Portfolio Management – Boosting Organisational Value. Newtown Square, PA, Project Management Institute.
- Project Management Institute. (2012). Pulse of the profession: in-depth report. Newtown Square, PA Project Management Institute.