Expected Value Defined
How does your company define the success of a software development initiative? The definition is pliable and unique to you, software engineers, and your customers. You know the variables that matter most to your company, and you can drive your software innovation strategy by analyzing the outcomes of your current strategy against your desired state. Companies use a variety of factors to determine their software development strategy, putting different weights on factors like the importance of capital expenditures, time-to-market, and customer satisfaction. When combined, together, this is referred to as the expected value of software development.
In the figure above we are assuming that customer satisfaction, capitalization of expenditures, and the time it takes to get to market are the values we weigh most heavily in determining the success of a software development project. They are also the indicators for continued support of innovation projects. We need to take a look at what is influencing these three factors to help us better understand how we can achieve the expected value of a software innovation project. The expected value is a predictable value of a variable. It is the sum of all possible values, each multiplied by the probability of its occurrence.
Expected Value Differs for Each Stakeholder
A wide array of stakeholders care about the expected value of software innovation, and no two stakeholders will calculate expected value the same way. A CEO will likely be focused on variables that drive to a competitive advantage. A CFO may concern themselves with minimizing fixed cost risks while maximizing expected financial returns. A product manager may think that solving a specific problem is the best use of their R&D budget, while a technologist may be preoccupied with how many breakthrough inventions result from a given level of investment.
As we mentioned at the start, the ratio of risk-adjusted input to output determines the expected value. The inputs for a customer may be speed, ease of use, convenience. The inputs for the CFO of the software product may be time to assemble team, on-boarding costs, and time to market.
The outputs are value. For the customer that is reliability, relatability and relevancy. For the CFO output is a function of minimized fixed cost risks and maximized financial returns. While the CEO cares about all outputs, their eye may be focused on revenue, margin, profit, market share and growth.
Calculating Expected Value
You can use the back of scrap paper or an elaborate spreadsheet to calculate the expected value for your next software innovation project. Keep it all to yourself or use it as a tool to drive discussion among your leadership team. Regardless of the role this exercise plays, it will only be valuable if you are realistic in your assessment of past work and the potential for continuous improvement moving forward.
Consider the various inputs your company values, the inputs you have control over and the ones you do not. Sketch the outputs you want to strategize towards and then reflect on the processes and systems that are in place, or need to be put in place, to meet your expected value.
All practices mentioned in this guide can be supported by either internal teams or external partners. Use the instructions in the next section to calculate the expected value of your next software innovation project.
Here are the key steps to calculate the expected value of your next innovation project.
- Know Your Customers
Your customers and their demands should be driving your business goals. Ensure you have a clear picture of all your customer sources. They may be longtime fans or strangers, waiting in the wings to try your next product.
- Understand Your Customers
Which customers are you trying to keep and who are you trying to attract as new customers? Why? Are you sure you understand what they are asking for? After all, they may not really know what they want! Do you have a tried and true process for capturing and analyzing their feedback and requests?
- Know Your Inputs
Inventory all the resources needed to execute your innovation projects. Drill down on the personnel and technical requirements, as well as the distinct components that come with the specific type of project you are planning: greenfield, legacy, refactor.
- Know Your Tolerances
Does your company or department have standard tolerances for personnel overages, time-to-market overruns, and completion rates?d
- Relate Inputs to Business Value
Know how customer feedback flows into the formation of your company’s business strategy and your business goals and objectives. Does your division have a masterly way of capturing customer feedback and market trends to help guide your strategic decisions. And how does this flow through to a prioritized product backlog?
- Know Your Team
Get a clear picture of what your team currently offers, where they excel, what they could improve on, their skillsets, and their deficiencies. Be realistic with their capacity.
- Know Your Process
Regularly analyze the work your software development process produces. Flag the improvements that could be made and the successes that should be repeated. Include yourself and other stakeholders in this analysis. Who usually provides the product vision to the team? How is the appropriate architecture and technology typically chosen? How quickly is the most innovative aspect of the new software application demonstrated in a shippable state? What role does Dev Ops play in your process and how can you engage them as early as possible?
- Know Your Process Options
Have a pulse on the software development options available to you. Your internal team may be the only solution you want to use because of their continued success. But what are your options to quickly produce a high-demand product if your current team is at capacity? Know the options for spinning up another internal team or looking externally for solutions.
- Make Friends with your CFO
Getting project approval for innovating software projects requires messaging a succinct value proposition. Make sure you understand your CFO’s concerns and interests around innovation projects.
- Know Your Time to Market Constraints
Be realistic with the constraints you have in getting a product to market. If you need a demonstrable product by a specific date to sell at a tradeshow, know the features that are absolutely required to get you there. And let go of the nice-to-have features for now.
- Relate Inputs to Business Value
Nail down they key outcomes that are important for you and your team/department to succeed. ROI, time to market for MVP, time to market for version 2, ability to predict completion time, and rework, scope change and delay tolerances.
- Have a Plan for Getting Customer Feedback, Fast
Getting feedback on the most innovative aspect of your product first is critical. Do not create a plan that will leave the innovative development until the end. Your team and all stakeholders should be testing the newest innovation within weeks of production in case trouble arises and you need to adjust the innovation. As soon as your customers get their hands on the innovation, make sure you are there to capture their activity and feedback so you can continue to prioritize the work with the greatest business value.
The Magic of Expected Value
Too many times, software development projects fail to provide the benefits that stakeholders desired simply because there wasn’t a process to capture what the true expected value was intended to be. Contact us today to set up a free consultation and start on the path toward defining the success of your next software development initiative.