Strategy as Code TM

More signal, less noise.

The Value of Value Streams

be sure to create more value than you consume


If there’s one thing you should know about your value streams, it’s if they create more value than they consume. Once you know how to determine operating costs and to ascertain the value of services provided, that won’t be a problem. We’ve discussed the cost side of the equation in the previous post, now let’s focus on valuation.

In a pinch, you could sell the output from a physical domain value stream on eBay for ten cents on the dollar, but what would the product of your knowledge work value stream bring on the open market? For many services whose consumers are within your own organization, there is no frame of reference for comparative valuation.


Reference Frames

A frame of reference for pricing a value stream exists when customers exchange tangible value for a service. Where there is an alternate source of supply for the customer, the price difference between options provides the context of competitive advantage, strengthening the valuation reference frame.

It is only right and good that traditional value stream mapping focuses on the endpoint when customers exchange tangible value for a service. The problem is that an overwhelming majority of value streams in enterprise systems are service fragments, where the consumer of a service is another service in the business. There is not really tangible value exchanged; there are budgetary arrangements, but these typically bear little relation to the actual values being produced and consumed.


Service Fragments

By focusing on the endpoint where tangible value is exchanged, traditional value stream mapping buries this ambiguity of valuation in the abstraction of a process flow, as if the question of profit and loss were somehow all taken care of somewhere else.

baton handoff in a relay race
A hand-off indicates a possible service-interface

To get at the question of what the product of a value stream is worth, we need to break it down to the interfaces between service fragments within the business. An interface is any point where work is completed to some predetermined standard (definition of done or exit criteria), which is then picked up by another group, team or process, with its own intake criteria. Without this kind of break down, we lose the fidelity needed for process management. The reasons for this will become clear as we examine what’s going on at the interfaces more closely.


Qualitative Valuation

Trying to set a price at each service fragment interface would be arbitrary and impractical, but that doesn’t mean we should ignore the question of what it’s worth. We can begin to ascertain value by evaluating qualitative attributes at the interfaces.

Like any product, the worth of an internal service fragment is not its cost, but rather it is a factor of the value placed on it by the service consumer. For intangible services, things like availability, reliability and utility commonly drive the perception of value. While these kinds of attributes don’t map neatly to profit and loss accounts on the ledger, they do provide important signals to management about what constitutes good value.

The first steps in tracking the value offered by a service fragment are:

  1. clearly delineate service boundaries
  2. work out attributes corresponding to what consumers value
  3. decide how to measure and report those attributes

Do those things before attempting to set a cash value.

The cash value of many knowledge work value streams is calculated in terms of costs avoided, rather than value created; a rollup of hypothetical effort that would have happened, but didn’t, because of the service provided. One can only imagine how easy it is to inflate the value of effort that didn’t happen.


Leaky Abstractions

50 gram gold bar
Knowledge work value stream valuations are abstractions whereas cash is cold and hard

Knowledge work value stream valuations are abstractions whereas cash is cold and hard. Sometimes the abstractions we use are good, sometimes they’re leaky; and often they don’t hold water at all. Still, upstream management usually redeems them all the same, taking dodgy metrics in exchange for budget gold, because without a clear cost and valuation methodology, attempts to get to the bottom of things often just leaves the inquiring manager holding can of worms. Better to just leave well enough alone.

The point is that the relationship between the actual utility of a service and how its valued is all vary hazy in the fragmented world of knowledge work. Without cost accounting that corresponds to actual activity and product valuations that correspond in a meaningful way to customer utility, management devolves into wishful thinking, avoidance, deflection and guesswork.

The risk of relying on casual value stream mapping lies in the default assumption that value streams produce value, even if operating costs is more than the service’s utility. Modeling losing propositions like that should be called “loss stream mapping.”

value stream map
A value stream that costs more than it's worth should be called a “loss stream”

Create more value than you consume

You want the bank of delivered value to be bigger than the draw on budget needed to keep feeding the machine. If you were running a donut shop, you wouldn’t settle for donut-batch burn-down metrics when you could just book expenses and count the till.


Just because the world of intangible services is more abstract than running a donut shop doesn’t mean that we’re somehow relieved from the responsibility of knowing if our services are operating in the black, or not. Having the ability to determine if a service is creating more value that it consumes is an essential knowledge work management skill.


Bibliography

Toyota Production System — Beyond Large-Scale Production  by Taichii Ohno
Throughput Accounting — TOC's Management Accounting System  by Thomas Corbett
Relevance Lost — The Rise and Fall of Management Accounting  by H. Thomas Johnson and Robert Kaplan
Thinking in Systems  by Donella Meadows
Thinking In Services: Encoding and Expressing Strategy through Design  by Majid Iqbal
Value Stream Mapping — Create Value and Eliminate Muda  by Mike Rother and John Shook
Lean Thinking — Banish Waste and Create Wealth in your Corporation  by James Womack and Daniel Jones


Art Credits

Blueprint Graphics  by Ana Michelle Godeck

Photo Credits

unsplash-logo Austrian National Library — "Relay race: German runner hands over the relay. Athletics championships 1940"

unsplash-logo Anne Nygård — "50 grams of .999 gold"




pattern language

Let's agree to define productivity in terms of throughput. We can debate the meaning of productivity in terms of additional measurements of the business value of delivered work, but as Eliyahu Goldratt pointed out in his critique of the Balanced Scorecard, there is a virtue in simplicity. Throughput doesn’t answer all our questions about business value, but it is a sufficient metric for the context of evaluating the relationship of practices with productivity.