Wednesday, July 22, 2009

Defining Business Value // #2 Customer Smile

Imagine that you want to make a new camera. And in the first release you will make 1,000 cameras and basically "give them away". Give them to key influencers, etc. So, all that that work does is make the customer smile.

Imagine that the picture here is not of Scarlett Johansson. Just a girl. And it represents all 1,000 customers who buy your new camera. You don't make any profit, just the smile. In fact, you lose $10 on each camera.

How do we evaluate the Business Value of that smile? Or those smiles. There are many ways one could approach this problem. Without explaining all my assumptions, let me quickly say this.

Well, presumably the smile is worth something later. You provided customer satisfaction, and they will come back and buy the next camera from you. Or tell their friends to, etc, etc. If you were clever you could estimate that.

But let's imagine that the Product Owner is not that clever.

Let's imagine you have 5 stakeholders, stakeholders who understand the business intuitively and have lots of experience of Business Value in all its aspects. Let's imagine that you have them to vote on the BV.

Earlier I recommended getting the list of stories for building this new camera, and having these experts play priority poker for those story cards. Relative value compared to a small reference card of 1 (the card that you all initially think has the least BV). Using the Fibonacci series up to about 1,000.

You do this exercise, even though the real number you need for business decision-making now is the total dollar value of the effort (eg, to judge whether to invest here or elsewhere).

Why do that? So that the team of 5 creates knowledge together about what the effort really is. If you are already sure they have a common view of the effort, and a fair amount of detail about it, then maybe you don't take this step of priority poker yet (eg, until after the project is "approved").

OK, now to estimate the overall dollar value.

Again, there are other techniques, but the one I will recommend first is have each of the Delphic experts write down their personal opinion on a piece of paper. Before being influenced by anyone. And some comments about why "my" number is right.

And then all flip the cards at once. And compare. The two extremes talk most, about why each had the highest (or lowest) number. The assumptions, and the issues they see with the other extreme. They might compare to previous efforts. "Project X had $20 million and I just don't see this as better than Project X, so I don't see how you can get to $24 million." Maybe they vote again, and eventually reach some closer consensus. Maybe they discuss again, and vote a third time. Then, however close they get, average the answers they give. Use that.

There is no harm if one or more of the "experts" wants to use a mathematical formula of some sort. They should share that formula.

You might, particularly in the first few months of using this technique, have a senior manager do a "sniff test". They bring him in and say "We decided this effort is worth $17 million, plus or minus about 100%. Seem reasonable to you?" If he can accept it as probably the best guess at this time, then they did a good-enough job. Or they might take his input, do a bit of scratching of the head, and estimate again.

Finally, as they get closer to production, someone should be working on a formula for BV, and how to prove, or at least get indicators about, whether that formula is relevant. Let's say a key aspect of the formula assumes that 900 of the first 1,000 users have a broad smile. So, they might use the Net Promoter Score to confirm that assumption. Etc, etc.

BV is hard. Like any prediction of the future, it is difficult, and likely to be off. Still, we need to learn how to be less and less off in our estimates. While all estimates are "terrible" compared to the precision of what reality will later give us, still it is better to make business decisions with the best info we have today than with no info at all. Even though very imprecise, and sometimes inaccurate (leading us in the wrong direction). Making no business decisions is not an option.

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