Chapter III

The Management of Value

Preparation

Large amounts of highly organized material are required to expand the range of possibilities before a new and useful combination of ideas can be generated.

William Peña, American Architect (1987)

Integrated value management is an “open iterative system” in which the output from one phase becomes the input of the next and feeds back to the preceding phases. Therefore, the Sensemaking-Ideation-Elaboration process will be iterated many times throughout the program or project life cycle in order to reassess customer values and their fulfillment. In practice, steps may be taken in a different order, or they may occur at the same time. Preparation can be part of the definition phase or take place before the study begins as part of a strategic diagnosis process.

In this section, I will aim to clarify many of the tools, techniques and concepts that a good VM practitioner should be aware of and that are used to conduct a well-prepared VM study.

Identification of the Need

Total Quality Management is doing the job right; Value Management is doing the right job.

J. J. Kaufman, American Value Specialist (1992)

Process control has always been the basis for quality-based project management, and it is clear that good process control will aid in performing the job correctly. Today, though, clients are asking for more than a job done in accordance to specifications; they want the right benefits, at the time of delivery. Value management is designed to identify the customer’s needs in order to do the right job; when combined with project management, it will ensure the right job done right. By applying VM in an iterative way, the program and project teams will be able to make the necessary adjustments along the way to make sure they deliver what is expected at the time of delivery.

The first step in identifying customer value is to understand the concept of need. The need should not be mistaken with the way it is expressed; need is created by a lack, or a feeling of a lack. Usually, because we are greatly influenced by advertising, we express our need through a product. The “need” we experience in that manner is often far removed from the actual need we have to fulfill, and the product we obtain fills the void only very temporarily. A good example of this is the increased prominence of special effects in movies, often to the detriment of a good story.

Clients are not different from children in that they “need” the new product that just came out, be it a new computer program or the world’s tallest building or the latest high-technology machine. But, the need should generate the product and not vice versa. When identifying customer needs, even accomplished value practitioners have a tendency to concentrate on short-term financial factors—like share value or cost reduction—and to forget other client objectives. Value management can help clients have their cake and eat it too, if the value team focuses on real needs rather than solely on achieving short-term financial goals.

The value study leader must take the time to identify the client’s needs and wants and ask the client appropriate questions about the program or project objectives, such as: “What is your problem?” “Why is it a problem?” “Why is a solution necessary?” The value practitioner should be both the translator of the customer’s vision and the challenger of his or her strategy. Dr. Stephen Kirk, a well-known architect and value specialist, suggests holding “an interactive workshop [where] project expectations are brought out, explored and documented” (1994). He continues:

“These expectations may involve schedule, image, flexibility, functionality, technical systems performance, budget adherence, or any other issue which may shape the direction of the project. The relative importance between these competing values are explored, prioritized and documented with the owner. Through collaborative workshops with the owner, a clear understanding, documentation and prioritization of the above competing values are realized for the project. These expectations and goals are explored and discussed in the workshop. Specific owner definitions of each competing value are developed.”

Customer-Oriented Value

Historically, Value studies have concentrated on “use” functions […] however, when attempting to improve the Value of products, “sell” functions become vitally important. […] “Value Mismatch” occurs when the producer places a different emphasis or degree of importance on use or sell functions than does the purchaser.

John Bryant, American Value Specialist (1986)

As we have seen in the section on value in Chapter II, value has different meanings for different people. Often, when setting up a program or project, there is a mismatch between the customer’s intent and their capability; the value study’s objective is to find, or re-create, the balance between these two elements in order for the program or project to be a success. Every step of the way, the value team must aim for that balance between what is expected, what resources are available to produce it, and what is needed.

The customer’s perceived value is often far removed from the quantified, measurable value of the performing team and its expert consultants. Many examples exist of “technically perfect” products that were a fiasco because of “misperception” of the functions the customer really wanted. This type of value mismatch occurs when the performing team and the customer do not have the same definition of the performance of a product, or when they have the same definition but don’t place the same relative importance on its functions. For example, the technical team may focus on producing a high-performing product, whereas the customer placed more importance on ease of use.

Customer needs should be regarded as an integrated system, one in which each element has an influence on the rest. It is only by contemplating the whole, not a discrete element, that one can understand the system. All these elements are to be listed and addressed to create a cohesive picture of the customer’s expectations and capabilities. Then and only then, will it be possible to offer customers a project or product that will match or exceed their expectations while considering their capability to afford it.

The basis of customer-oriented value management is to identify the success criteria and areas of improvement that are meaningful in the customer’s perception of value. The customer value concept must be present throughout the study, guiding every decision, from the sensemaking phase to the decision to execute. In wider-ranging programs, customers are replaced by a group of stakeholders and one talks of stakeholder value.

The Value Management Team

The reasonable man adapts himself to the world, while the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.

George Bernard Shaw, (1903)
“Maxims for Revolutionists #124”

As mentioned earlier, a performing value management team is composed of representatives of all the main stakeholders in a program or project. Since we want a diversified value team, goals and agendas will not be the same for every participant, and since we also want the team to deliver original solutions, one should not expect team members to be reasonable. We will examine each team member’s role and/or influence.

Identifying Influences

The mood of a value workshop is usually set early on. It is, therefore, important for the facilitator to understand how each stakeholder can influence this mood and impact the outcome of the study as well as the program or project process. The team has to be balanced, and participants must be well prepared in order to avoid pitfalls during and after the value study. Negative stakeholders must be met individually before to understand the issues that affect them and to try to show them how the workshop can help resolve these issues.

Stakeholders

Often the client is a company; and it can be difficult to identify the true customer. A good rule is to identify the person responsible for “signing the check,” as this person is generally considered the sponsor and is the one that you need to “get on board” to ensure the success of the study.

Other important stakeholders are the program and project managers as well as the change agents. They are responsible for the success of the delivery of benefits and results and will therefore be interested in any method that facilitates the work or increases control over the program or project.

The operations and maintenance manager and the users are most aware of the project or product’s performance in the end. Therefore, they will be very interested in the long-term (life-cycle) performance of the product and in the transition process from project to operations. Change recipients are often neglected because they do not exercise formal power, but they are the true customers, those that will be directly affected by the successful outcome of the program or project.

Consumers are considered customers only if the study focuses on the design of a product that is backed by marketing studies. In the case of an existing product, consumer comments must be collected prior to the workshop. In the case of an organizational program or project, the staff in the affected departments must be interviewed before the workshop so that the facilitator has an appreciation of their needs and concerns.

Finally the chief executive officer or board of directors will usually be the entity that requires “esteem functions.” They are interested in high-profile objectives and are often not interested in the mechanics of the study or the actual solutions that it achieves, as long as the impact is positive for the organization as a whole.

In understanding how each stakeholder respectively influences the program or project, the value management team can very accurately determine the interests at stake and develop a value system that will enable them to establish priorities and find the best customer value, balancing cost, esteem, and life cycle, to achieve success of the program or project objectives.

Participants

A value management workshop’s results are optimized when all participants are convinced that the methodology works. This may mean holding an information session prior to the workshop to ensure that everyone involved in the study has the same level of understanding of the process and of its expected results.

The team should be well balanced between technical and functional experts as well as between planning, execution, and operations personnel. All fields covered by the program or project should be acknowledged. When more senior managers are included as participants in the workshop, the facilitator should make sure that they are familiar with value management and that they agree to abide by its rules.

Senior managers usually have the most at stake during a value study. They also have a tendency to unwillingly overwhelm other participants and take the floor, especially during the creativity phase where parity of opinions is essential. It is the role of the facilitator to control any forced input from senior managers, especially during the ideation phase when creativity is essential to success.

Person in Charge of Implementation

It is good to remember that the successful implementation of value proposals is the ultimate measure of success of the value study; it also is the most difficult task to achieve since the value team usually does not have the responsibility for implementation. Therefore, the identification of the person who will be in charge of implementation and results delivery should be done as early as possible in the study. One of the goals of the value study is to get that person or group to buy-in the recommendations of the value study. The value management team should be aware that one way to accomplish this is to let them know how their work will be eased and how results will be improved by value management.

Team Preparation

As stated earlier, all the team participants should possess the same basic level of understanding of the value management methodology. Therefore, it is advisable to provide a basic awareness session in value management before the workshop actually takes place. Furthermore, team participants should receive all relevant information regarding the study to be undertaken prior to the workshop in order to become familiar with the program or project objectives and issues beforehand. This will focus energies during the definition phase and enable participants to clarify ambiguous issues or objectives to be discussed later.

I have been very successful in using a “briefing pack” that also lists objectives, constraints, participants, proposed agenda, and others elements required to carry on the study. Typically the business case, which identifies the project or program’s main objectives and parameters, can form the basis of this briefing and will be communicated.

Each member of the core value team will be given this information and be expected to spend some time examining the background information of the program or project. Usually, one-half day to two days per person is allowed for this task, depending on the size and magnitude of the program or project. For the extended team, familiarization can be done individually or the information can be presented at the beginning of the first workshop.

Team Work

By design and by talent, we were a team of specialists, and like a team of specialists in any field, our performance depended both on individual excellence and how well we worked together. None of us had to strain to understand that we had to complement each other’s specialties; it was simply a fact.

Bill Russell, Boston Celtics Player, 1956–69

Considering that a good value management multidisciplinary team is composed of specialists, understanding the principles of team work and accepting them are key elements to the success of the value study. Team development involves four basic principles: a common vision, which is developed through the sensemaking phase; a viable structure, provided by the job plan; a motivational system, achieved through the setting and achievement of goals; and good team leadership, which is established by a competent value team leader.

Common vision and motivation involve the capacity to positively relate to others. Ideally, every participant is aware of his or her own personality (pros and cons) and tries to understand teammates’ values and points of view; they are allowed to express their feelings, and to ask for clarification if needed. Other important aspects concern the actions to be taken; this involves being honest about your own experience and expertise, volunteering for tasks to be accomplished, taking initiatives and implementing them, and actively seeking evaluation.

Structuring the team process entails the clarification and respect of procedures, sticking to the subject and content, making your interventions short and to the point, always trying to make the issue progress, accepting the team’s decisions, listening to understand—all are important elements of success. The structure of the value management job plan is designed in such a way that the team spirit builds and becomes contagious; even conflicting individuals have a difficult time negatively influencing the group if the team sticks to the job plan and if the facilitator can manage this process effectively. Finally, leadership involves the capability to foster all of the above while maintaining focus.

Creativity

Imagination is more important than knowledge.

Albert Einstein

Habits, paradigms, and preconceptions are an important and very useful part of everyday life as they protect us in unknown situations by enabling us to react quickly and decisively. But they are also the worst enemies of creativity, as they prevent us from seeing alternate solutions. There are many reasons to use creativity techniques in value management, such as: to overcome our natural resistance to change, to favor the structured expression of innovative ideas, to avoid the discarding of potentially valuable ideas by deferring judgment, to tactfully control overpowering individuals, and to enable shy individuals to actively contribute.

The use of creativity techniques should not be restricted to the ideation phase; they can also be useful in other phases. For example, in the definition phase, it assists in defining the problem and evaluating potential benefits of the study. In the function analysis phase, creativity can be used to generate a list of functions with good descriptions; in the ideation phase, they help identify numerous alternatives to fulfill the functions. Creativity is beneficial in listing criteria by which functions will be judged during the elaboration phase, and it can assist with identifying selling points and possible objections or to find the easiest implementation paths for proposals during the decision phase.

Creativity Concepts

In order to come up with one good idea, you must have lots of ideas.

Linus Pauling, Swedish Scientist

As we have seen, the entire value management process benefits from a creative thinking approach. There are four essential steps involved in creative thinking: preparation, gestation, enlightenment, and implementation. Two basic techniques are applied in creative thinking.

The first is the association of ideas, which consists of three basic principles stated by Aristotle: similarity, contiguity, and contrast: Identify new ways of doing things by looking for something similar, something that complements or builds on it, or by something that is divergent or even conflicting.

The second technique is to use both hemispheres of the brain in a sequential and constructive manner to innovate. The process is divided into two steps: lateral thinking (imagination and creativity), and vertical thinking (analysis and judgment). “Lateral thinking,” consists of exploring new paths of thought instead of pursuing a given path (de Bono, 1992), while vertical thinking consists or rationally establishing the best path to pursue. Typically, vertical thinking is selective, lateral thinking is generative; vertical thinking is sequential, while lateral thinking can jump. With vertical thinking, one excludes what is irrelevant; with lateral thinking one welcomes chance intrusions. Vertical thinking follows the most likely paths, and lateral thinking explores the least likely ones.

Creative thinking works only if both processes are used in sequence: first open up to new ideas, secondly select the best ideas to implement, but if the two techniques are used together creativity is limited by our innate resistance to change.

Some basic rules apply to creative thinking:

  1. Write all ideas and comments.
  2. Target quantity rather than quality.
  3. Exclude criticism; assume that each idea will work.
  4. Hold judgment until the evaluation phase.
  5. Eliminate “impossible” from your vocabulary.
  6. Let your imagination roam free (the craziest ideas are often the most important).
  7. Use piggybacking (build on other ideas and comments).
  8. Cross-fertilize ideas (associate or modify ideas and comments).
  9. Let everybody talk; do not interrupt!
  10. Build a friendly competitive atmosphere.

Psychological safety and freedom of speech should be an integral part of any creative session; ideally, all participants be on the same level of authority; if a manager or supervisor participates in the workshop they would be open-minded and trusted by the other team participants. If this is not the case, it is the role of the facilitator to control them.

Creativity Techniques

Before choosing any of the following techniques, the value manager will evaluate the type of program or project, its stage, objectives, and the composition and background of the team members. Creativity techniques can be combined, since the ultimate goal is to form a vast quantity of ideas in a short period of time.

Brainstorming Osborn Technique (Osborn, 1963)

Brainstorming is a group process that was developed in the seventies by Alex Osborn (1971). It begins with the identification of the issue at hand; the group is then asked to meet as a whole to determine creative solutions to the issue. It is the process that can be applied the most widely in value management.

Brainstorming Gordon Technique (Gordon, 1961)

This technique consists of a group brainstorm based on general knowledge of the function(s) or broad areas of a problem without any specific knowledge of the problem itself. The exact problem is not identified until the leader feels that all possible solutions have been explored.

Brainstorming techniques work best in small groups (5–8) with an experienced facilitator. In larger groups it is more difficult to control powerful individuals and offer everybody the opportunity to speak up: opportunities are therefore lost.

Stepladder Technique (Rogelberg, Barnes-Farrell, J. L., and Lowe, 1992)

Research has demonstrated that there are some problems associated with traditional brainstorming, like social inhibition, created by shyness or dominant individuals; social loafing, which distracts from objectives; and production blocking, which increases inhibition of individuals in a group situation

The stepladder technique was developed by Steven Rogelberg, Janet Barnes-Farrell and Charles Lowe in 1992: It is typically used with large groups and focuses first on individual contribution, uninfluenced by others, before sharing with the group. It is based on the concept that individual creativity is often more productive than group creativity because of undue influence in groups.

Many variants exist of the stepladder, from: individual “braindump,” followed by sharing, one at a time, with the whole group, to step-by-step individual “braindump,” then sharing in pairs, then groups of four, and finally the whole group.

This technique is effective with large groups or with groups where there is a risk of power play that needs to be controlled. The role of the facilitator is less active and requires more organizing than actually facilitating. In this case, the facilitator should have a good capability to synthesize many ideas into “workable” alternatives.

Checklists

The goal of this technique is to generate ideas from existing data and collect good ideas accumulated in other similar studies or projects. This technique is very useful if one can identify ideas that have occurred regularly in past studies or projects.

Morphological Analysis

The idea behind this technique is to divide a problem into its parameters (elements); a model is then developed that lists all the possible combinations that might lead to a solution. Combinations and/or permutations of elements are then “tried” to solve the problem. Usually, one axis is used for the processes, the vertical axis represents the concept, and the third axis is for technical parameters.

Attribute Listing

Attributes and characteristics of the problem are listed and then the impact of changing one or the other is examined. This technique allows new combinations of characteristics or attributes to solve the problem in a situation where an existing situation or product needs to be improved.

Environment and Stakeholder Analysis

This method is used in function analysis, as promoted by the Association Française pour L’Analyse de la Valeur (AFAV). It consists of identifying all external factors that relate to a project or product and listing their impact (in terms of functions) on the project, the project’s impact on them, and their impact on each other throughout the existence of the project or product. Stakeholder analysis is a form of environment analysis used at strategic level.

In integrated value management, the preferred techniques are brainstorming for small VM aware groups and stepladder for larger groups less familiar with VM principles. For Function analysis the preferred technique is environment analysis for product-based projects and stakeholder analysis for strategies and programs. The goal always is to find a wider range of innovative ideas to work with, whatever the method employed to attain it.

Data Gathering

He who grasps at much holds fast little.

Spanish Proverb

Data gathering is a key phase of any value study. Too little information leads to a partial statement of the problem; too much can confuse the issue, especially if it is contradictory. The appropriate amount of information should be broad enough in scope to pertain to the whole issue but not so broad as to get out of focus.

The crux of the information gathering process lies in organizing data for easy assimilation. In ambiguous or complex situations, groups often make the mistake of trying to gather too much information before resolving issues and, in doing so, confuse the issue even more. The key is to initially resolve issues and then seek additional information to identify alternative solutions. This frequently happens in organizational change situations when the group of people concerned is not given enough sensemaking time.

The entire value management process is based on the relevance, accuracy, and knowledge of data significant to the program, project, or product under study. Data gathering can, therefore, be divided into three steps: collect, analyze, and communicate data.

Collect Data

First, the team leader should identify all the data needed to successfully conduct the value study while keeping its scope in mind. This person then should collect data from the different parties involved in the project or program and identify all missing information. The following questions should be asked: What facts are known? What do you need to know that you don’t know? Where or how can information be obtained?

The Project Management Institute (PMI) lists ten functions (Knowledge Areas) for project management that basically cover the main areas of a project: integration, stakeholders, scope, quality, time, cost, human resources, procurement, risk, and communications (Project Management Institute, 2013a). Reviewing information requirements for the five Process Groups (initiation, planning, execution, control and monitoring and closing) for each of these project management functions can be a good checklist for possibly missing information.

Other functions must also be covered in specific application areas, for example: safety in construction management, regulatory in finance, data management in pharmaceuticals or security in information technology. All collected data and information must be recorded.

Analyze Data

Collected data is then verified and validated. All information—fact or assumption—is documented and sources are identified. Opinions or prejudices are recognized and restricted as much as possible. Information is consolidated—meaning that it is classified, cross-referenced, and cross-checked—in order to make sure that facts are presented only once (no contradictions), and that references are valid.

This step should be conducted with the help of the team participants who have the expertise to evaluate specific data and validate it.

Communicate Data

Once information is classified and consolidated, the team leader will structure the information into a framework and format data in order to best communicate it to all participants on the team, as well as to obtain consensus from the stakeholders. This involves preparing models, graphics, tables, sketches, and so on.

Data communicated to the team can include design, estimates, schedules, functional relationships, organizational structure, procurement facts, environment, legal structure, standards, regulations, technical restrictions, and so forth. The amount of data provided by a client can be staggering. It is the team leader’s responsibility to synthesize all information to prevent what Peña calls a “Data Clog,” which “causes confusion and prevents clear conclusions. [It] paralyzes the thought processes and a mental block against all information can result” (Peña, Parshall, and K. Kelly 1987).

Peña also states: “One can assimilate any amount of information, as long as it is pertinent, meaningful, and well organized for effective use.” In the face of overwhelming amounts of information, Sheena Iyengaar (2012) recommends to categorize or group the data; to concretize it with significant examples; progress from the simple to the complex, and to generally cut the amount of data (by eliminating what is not essential).

Cost Techniques

Cost is a major frame of reference used to assess the value of the products we acquire. This value might be in terms of the quantity, quality, aesthetics, image or other criteria. In the comparison of alternatives, cost adds the element of objectivity needed to analyze alternatives.

Larry Zimmerman, American Value Specialist (1982)

Value practitioners should always remember that cost is a means, not an end. Cost techniques can be used in many phases of the study, program or project; for example, in the definition phase, they are useful in identifying potential optimization (life-cycle costing analysis, budgeting, cost models, and so on).

During the function analysis phase, these techniques are helpful in allocating function costs and defining cost/worth, while in the evaluation phase, they help compare alternatives, such as cost/worth models and matrices. Cost techniques can aid in estimating the cost of alternatives (elemental estimates and life-cycle costing) in the development phases and in communicating potential benefits to the client during the recommendation phase.

This section is intended to show the degree of accuracy required at various stages of design and to show how the cost estimates are transformed into cost models used to relate and compare alternatives. Cost estimates and cost models are communication tools; they also are a standard frame of reference that will give all parties a means to understand the exchange value (worth) received in return for investment. The aim is to have all members of the project team agree on costs.

Cost Estimating

Cost estimates can be prepared by the developer or cost professional; the value consultant must ensure that costs are accurate. Cost estimates are prepared using different levels of complexity. Cost estimates form the basis for cost models used in a value study. Zimmerman has organized costs into five orders of complexity: first-order costs, or the total cost of the project; second-order costs, a combination of system costs; third-order costs, distribution of cost by subsystem; fourth-order costs, system components; and fifth-order costs, detailed estimates based on actual costs (Zimmerman and Hart, 1982, chap. 7).

Estimate Types

The type of estimate will vary to correspond to the purpose, complexity, and phase of the project as well as data accuracy and availability. During the preliminary planning stages of the project, the degree of accuracy of cost estimating usually is conceptual in nature and based on past trends and historical knowledge of similar projects (see 1 and 2). During the conceptual and development stage, costs are based on elements (see 2 and 3). As the program or project develops, more and more data is generated to detail cost estimates (see 4). Cost units also vary during the project evolution.

  1. User costs are based on units of basic function performed when a product or facility is used. Examples of user costs are cost per bed in a hospital, vehicle operating costs in transportation, and cost per capita per day for treatment of sewage. User costs can be used to obtain a gross estimate of the total project cost.
  2. Parametric cost convert characteristics of product (parameters) into mathematical models to predict cost. For example: in construction projects, area or volume; in aerospace, weight; or cost per line of code in computer programming.
  3. Elemental costs are grouped by functional systems and subsystems. For example: fabrication processes and sub-processes; building elements (foundations, mechanical systems, interior partitions, etc.) or in IT, people processes and technology.
  4. Unit costs are the cost of each unit of material or equipment and labor hour used in the project.

Public Works and Governmental Services Canada (PWGSC) uses a “D to A” classification for building construction projects, which can be generalized for any type of estimate. D is generally used early on, whereas A is the more detailed cost estimate used when most factual data is available.

  • Class “D” Estimate is based upon a comprehensive statement of requirements in mission terms and an outline of a solution. Such an estimate is strictly an indication of the final project cost and completion date.
  • Class “C” Estimate is based upon an outline description of overall scope and siting of the equipment or facility sought. It should be sufficient for making the correct investment decision.
  • Class “B” Estimate is based upon data (relative to cost, timing, and production or construction) of quality equivalent to that available following the definition of the major systems and subsystems of the equipment or facility, including an outline of specifications and preliminary drawings and models. This type of estimate should provide for the establishment of a realistic budget and schedule, sufficiently accurate to permit control of a project.
  • Class “A” Estimate is based upon a complete description of the equipment or facility sought, such as would exist when the concept design, working drawings, and detailed specifications and other significant conditions of production or construction are available.

It is important to respect these parameters in order to optimize the value of the study. The goal of the value study is to attain the greatest value within the allotted time-frame. If too much time is spent on detailing estimates at a stage where the proportion of assumptions is still substantial, less time will be available to increase the value of the project, and proposals will be based on inaccurate data.

Elemental Estimating

Elemental estimation was originally developed for construction projects; it consists of classifying costs according to the components (elements) of the project (Figure III-1). This method was first used in the United Kingdom and was exported to Canada by British Quantity Surveyors and then to the United States. The Canadian Institute of Quantity Surveyors, Royal Architecture Institute of Canada, and the American Institute of Architects have been promoting elemental estimating since the early eighties. In 1993, the American Society for Testing Materials issued Standard E 1557-93, “Standard Classification for Building Elements and Related Sitework—Uniformat II.” This standard is now beginning to be recognized as the elemental classification standard and has been adopted by the U.S. Department of Commerce (NIST, 1999).

images

The concept of elemental estimating is not exclusive to construction; it can be applied to any product. The concept consists of dividing the cost of a program or project into its components in a hierarchical way, very similar to a function diagram or function breakdown structure (FBS), a benefits breakdown structure (BBS) for programs (Thiry, 2010) or a work breakdown structure (WBS) for projects. The advantage is to be able to identify cost allocation very early in the project and still be able to proceed into more detail as information becomes available by subdividing high level components into smaller sub-components. Elemental estimation provides a continuous structure for the estimating of costs during the whole planning process, as well as a means of verification during execution.

Life-Cycle Costing (LCC) and Present Value

Life-cycle costing was first developed in the United Kingdom in the thirties by Eugene L. Grant and was soon adopted by the Public Services Administration. It was introduced in the United States in the early fifties at Bell’s Engineering Economy Department. In 1980, the American Society for Testing Materials issued Standard E 917-89 (revised 1989) on life-cycle costing.

There are many definitions of life-cycle costing. The American Institute of Architects (AIA) defines life-cycle costing as follows (Haviland, 1978):

Any technique which allows assessment of a given solution, or choice among solutions, on the basis of considering all relevant economic consequences over a given period of time (or life cycle).

Value management relies on life-cycle costing at every stage of a study to evaluate optimization potential or compare alternatives or proposals that transcend the project into the operational life-cycle. Life-cycle costing consists of comparing cost/worth alternates on the same calculation basis by bringing all the costs to a common baseline on two basic principles: the global expenditure of resources and the present value of future expenditures. Net present value (NPV), which is based on the LCC concept, is routinely used to compare business initiatives.

When estimating costs or expenditure of resources, the value team must be aware that typically capital or investment costs represent only a portion of the overall life-cycle cost. In order to accurately compare alternatives, one must consider all types of expenditures involved. For example, in a construction project, the following would be considered: initial costs, including soft costs (feasibility and design fees); development/construction costs; useful life costs, involving soft costs (legal, administration fees and financing cost), operation costs, and maintenance costs, as well as taxes; and end-of-life costs, involving salvage value and cyclical alteration/replacement costs.

The second principle is the “time value of money,” which consists of comparing present and future expenditure of monies on an equivalent basis known as “present value.” Some basic economic parameters have to be set before entering time value calculations. They include period of study, discount/interest rates, escalation/inflation rates, cyclical renewal periods, taxation provisions, financing methods, and investment criteria (return on investment, pay-back period, and so on).

Economic formulas are the mechanism used to equate the factors of time, interest, present costs, future costs, and annual costs. For ease of use, these formulas have been translated into tables, which are readily available, or included in any decent “financial” calculation programs. To understand life-cycle costing calculations, two basic concepts are necessary: the concept of compound interest and the reverse concept of discounting. Discounting is the method used to express costs at any given time on an equivalent basis.

The basic formulas for calculating present value (P) and future value (F) are the following, where i represents the interest rate and n, the time period:

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As a rule, the present value is always smaller than the equivalent future value. All other formulas for calculating present and future value of uniform series of payments, escalating amounts, future investments, and so on are derived from these two. Figure III-2 is a graphical representation of this concept.

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Another definition that might be useful to remember is the difference between constant and current currency. Constant currencies are expenses of past or future years expressed in the currency value of a reference year (present value). Current currencies are the actual monetary value of expenses in the specific year in which they occur.

Using Life-Cycle Costing

Before proceeding with a life-cycle analysis, it is best to ascertain the validity and availability of cost parameters in regard to the expected accuracy of the results. Life-cycle analysis, because of its reliance on factors that are often difficult to predict accurately, is used as a comparative method in decision making and should be used as a predictor only when the factors used can be considered relatively stable over the life of the product.

Using life-cycle analysis as a decision making tool involves certain steps: the first is to identify the problem to be solved; the second is to document alternate schemes to be compared with background information on components and their differences; and finally, one must set project parameters of time, cost, and the cost of money. Setting time involves setting the useful life of the project or product and of each of its major components in order to assess alteration or replacement costs. Cost encompasses the initial costs, useful life costs, and end-of-life costs. The cost of money is considered by setting interest, inflation, and escalation rates.

While life-cycle costing provides an excellent tool to assist in decision making, its application should be understood to avoid possible pitfalls in its use. Life-cycle costing monies are constant and, therefore, do not reflect actual budget monies, estimate monies, cash-flow, and the obligated amounts for each funding year. The exact point in time when an extra investment will be repaid is sometimes hard to assess. Life-cycle costing is based on assumptions that can change very quickly (return of revenue, interest rates, and escalation). Return on investment rates and pay-back period may vary according to non-economic factors. The estimates are only as good as the background data forming the basis for costs, and the analysis of results is based solely on economic factors.

Final analysis should account for non-economic criteria that have intrinsic benefits that do not lend themselves to finite cost evaluations. The final decision relies heavily on judgment and on abstract factors, such as safety, reliability, operability, and environmental factors, to name a few, that may be more important than monetary savings. Life-cycle analyses include many areas that use soft numbers that create a margin of error inherent to the life-cycle costing process. However, the order of magnitude of the cost comparison makes life-cycle costing a worthwhile tool. It is the best tool available for computing order of magnitude comparisons.

Modeling

Give me a lever long enough and, single-handed, I will lift the world.

Aristotle

Because of the desire to limit the time allocated to studies, value management relies on modeling techniques to increase understanding of the issue and to communicate complex concepts that would otherwise be difficult to visualize by the client and other participants. Models are a great communication tool and since the value methodology puts a strong emphasis on efficiency, modeling should be part of the value practitioner’s toolkit.

Model analysis is a central part of any integrated value management study. Modeling techniques can be used in many phases of the study or project; for example, they help with identifying potential optimization (cost models, quality, models, and so on) in the definition phase. In the function analysis phase modeling techniques can help with function breakdown structure and element/component models, while in the evaluation phase, they aid in comparing alternatives with previous models (cost/worth models). Finally, in the recommendation phase, these techniques help communicate with the client.

The author uses the following modeling techniques.

Model Development

In the early definition phase, cost models are based on high level tasks because the product is not yet designed. Typically it is divided by key contributors to the program or disciplines involved in the project. For example, in an organizational change program, key contributors could include: PMO (program management office), marketing, finance, IT, procurement, HR, external consultant, etc. (see Figure III-3). In a construction project, disciplines would include architecture, structural, electrical, mechanical, and landscape (see Figure III-4); for software development, design, development, testing, and marketing may be involved; and for pharmaceutical, disciplines may include research, process development, clinical trials, governmental approval, and marketing (See Figure III-5).

In a technical program or project, the model can be based on product components like IT systems, legacy integration, training, communication, recruiting, etc. for a change program; infrastructure, foundations, envelope, internal partitions, internal systems, etc. for construction projects or fuselage, wings, reactors, cockpit, radar systems, undercarriage, etc. for a plane development program.

These types of models are usually presented in the form of a bar chart (See Figure III-3), pie chart (See Figure III-5), spiderwebs or work breakdown structure (See Figure III-4) for more detailed estimates. Each type of diagram has its use; the choice of diagram depends on what information needs to be conveyed and what is the best way to do so. Some models are better to convey raw information, others better for comparison, and others for detailed analysis.

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Cost Modeling

The cost model is a tool used to organize and distribute estimated costs into functional areas that can be easily defined and quantified. To construct the cost model, the value team leader and/or the estimator on the value team distributes costs by high level WBS component, processes, trades, systems, or any other identifiable area. This helps the value team understand from the beginning where the major costs, and hence possible opportunities for value improvement are. The extrapolation of Pareto’s Law of Economics indicates that 80 percent of the costs will normally occur in 20 percent of the items being studied; it is those 20 percent that we are seeking, so, a good cost model helps to quickly identify where the bulk of the cost lies. A good cost model enables the team to focus quickly and use their time effectively.

Matrix Cost Model

In this model, costs are organized by functional system and subsystem (function breakdown structure–FBS) along the vertical axis, and by component breakdown (work breakdown structure–WBS) on the horizontal axis. The function cost is the cost estimated for providing a function, or the amount of resources required to provide an expected benefit. As in a WBS, in the FBS, the sum of all the function costs equals the total cost of all the components of the project or program; therefore, the total cost of the project, or program, should be equal to the sum of the function costs. Determining function costs is part of the function analysis process.

A matrix cost model is especially useful for process plant designs when a process or functions span multiple components or when component parts are repeated throughout each unit of a process. The cost matrix can be readily understood and utilized by the designer to analyze cost per process function and cost per trade element. Depending on the project, cost can be reflected functionally to enable function cost/worth assessment. In any case, the costs should be organized so that one can equate the cost with an identifiable functional quantity.

Function Cost and Cost/Worth Models

The function cost model distributes the project costs by functional area. This model is used to compare two types of costs: the estimated or the actual cost against the target or worth cost. The worth or target cost is the value team’s estimate of the least cost to perform the function. The identification of the target costs is performed jointly by the team members. The worth or target is the least cost estimated to perform the required function. Identifying a worth on the various cost categories stimulates team members to devise alternative solutions to the original design. Models involving cost play an important part in the value engineering process; for this reason the team should comprise members with a keen sensitivity to cost.

Cost/worth models are based on the exchange value. From the list of functions, the team establishes a worth model that can be rendered in a graphical form such as a Gantt diagram (bar chart) (See Figure III-6). Each function’s worth is calculated by estimating the lowest expense of resources needed to fulfill the function. The cost is then calculated by estimating the proposed solution or alternative’s function expected resource expenditure and comparing it against its worth. This model will be used to identify functions or components for which the team can observe a cost/worth mismatch that justifies being addressed in the value workshop (e.g. Function 3 in Figure III-6). A high differential between cost and worth indicates a low value for that function/component.

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Function Modeling

The function diagram or function/benefits breakdown structure (FBS/BBS) (see Figure III-15) is the basic output of the function analysis phase; it uses a how-why logic based on the FAST diagramming concept developed by Bytheway (1985). It is through the function breakdown structure that the project team will develop the customer-oriented work breakdown structure. In program management, the FBS replaces the WBS of the project. For details on how to develop the FBS, see the Organize Functions section.

The FBS clearly identifies the purpose of the program or the project (higher-order function) and eventually breaks it down into individual actions or activities that need to be undertaken to realize the purpose. The FBS is developed until a lower level function can be related directly to a measurable component. The FBS helps define and share the value profile of the project or program with all participants, and enables the team to clearly scope the project or program according to its expected performance or benefits (functionality). The FBS is the basis for many other models.

Quality Modeling

Quality modeling was developed by Smith, Hinchman & Grylls (1993), a Detroit architectural and value management firm. Quality criteria (customer requirements) are established with the client and validated with designers in order to obtain consensus. An ideal quality model is then built using a spider web diagram (See Figure III-7). All future design alternatives are then compared to this “ideal” model and evaluated accordingly.

Space Modeling (Component Modeling)

The space model is used mostly in construction projects, but can also be used with the components of a product or project; it is a graphical representation of the functions and components of a product or process and their mutual relationship. Areas are calculated according to regulation and client requirements for each function as well as anticipated population. Technical requirements are then added to each component to produce the technical blueprint. Comparable component models can be used in any type of VM study.

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Others

Models are very useful to the value practitioner. Once the basic principles of modeling are understood, you can create your own models according to the information you want to share. Standard computer programs are very easy to use and can be very handy tools for building models. In construction projects, for example, it is possible to use a test reference building (TRB), a virtual model derived from the space model, to calculate the worth of the project (Charette, 1981). In computer games development, developers use basic storyboards and graphic drafts as a base and add detail. All of these modeling techniques can be used to the extent dictated by the size and complexity of the project.

Sensemaking

Sensemaking consists of all the activities necessary for the stakeholders to build a collective understanding of a situation, develop a strategy for the project or program and define a shared desired outcome. The sensemaking phase comprises two sub-phases: Definition of Objectives and Targets, which consists of clearly understanding the situation, and Function Analysis, which consists of identifying and agreeing on objectives with the key stakeholders; this last process leads to scope definition and the development of a value profile for the program or project.

Definition Phase

If I was given one hour to solve a problem on which my life depended, I would take 40 minutes to study it, 15 minutes to review it and 5 minutes to solve it.

Albert Einstein

The definition phase consists of getting everybody on the VM team to understand the basic project or product information in the same manner and agree on objectives. In a value engineering or value analysis workshop, the client/sponsor presents the objectives of the project or program and of the VM study; the program manager or business analyst covers strategic issues, and the project manager and/or designers discuss tactical issues.

In traditional VE or VA 40-hour workshops, key project stakeholders attend only the information and recommendation phases. During the information phase, they confirm and validate data and commit to objectives; during the recommendation phase, they review the value team’s recommendations and commit to implementation.

During the definition phase, the scope of the study is identified; a series of issues are addressed in the presence of the key project or program stakeholders. These include, but are not limited to: the value study’s expected results, potential areas of impact, quality expectations, risk assessment, and identification of major stakeholders. The aim of that phase is to reach a mutual acceptance of different points of view for the sake of the project’s success.

In program management and integrated value management studies, the definition phase consists of performing a stakeholders’ analysis: identifying and classifying/mapping stakeholders; clarifying their specific needs and expectations, and agreeing on their high level objectives.

The principles stated in this section are not exclusive to the preparation/definition phase and can be used throughout the study to confirm and/or assess changes in key stakeholders’ objectives and then to gather, validate, consolidate, model, and communicate any new data to the team in particular and other concerned stakeholders.

Presentation

The goal of the presentation is for the client or sponsor and their team to clarify their objectives and present the situation and its issues. The presentation typically includes: justification and triggers for the project or program, main objectives, key stakeholders, high level issues and risks, key parameters, etc. The VM team’s role is to ask all the necessary questions to fully understand these issues and to satisfactorily resolve any unclear matter.

The presentation can also include strategic issues, scope of project or study, quality expectations, deadlines, and budget; design (if at the design stage), involving rationale for the design, design criteria, systems and sub-systems, and alternative solutions (if any); tactical issues, including organizational structure, procurement, technical components, and production processes; and constraints, which involve codes and regulations, the environment, as well as legal and political issues.

The VM team leader will ensure that all team participants have the same understanding of the issues at stake and will ask questions, restate, reiterate, and recapitulate until all team members and stakeholders agree on all the issues.

Function Analysis Phase

If you accept the premise that understanding the problem is fifty percent of its solution, then separating the problem from its symptoms and effects by analyzing its functions is essential to the process.

J. J. Kaufman, American Value Specialist (1982)

Function analysis is what distinguishes value management from all other similar techniques and has enabled it to survive for over 70 years as a recognized optimization and improvement method. It is the factor that enabled VM to be used in conjunction with, or be integrated in, numerous fields and domains. The purpose of function analysis is to develop shared objectives and, based on these, to define expected benefits and value for the program or project. In order to achieve this, the value team will agree expected benefits and value, identify and prioritize critical success factors (primary functions), and define agreed-on performance indicators (characterize functions).

Eliciting the Needs or Expected Benefits

Function analysis consists of abstracting technical or project solutions in order to concentrate on the actual needs and wants of the customer or expected benefits of the stakeholders. It guides every participant (expert and layperson) and stakeholder toward a consensus on the objectives of a program or project because of its basic rhetoric. It is the foundation for effective change management because it enables abstraction of change requests to a level of basic needs that is more stable and customer-oriented.

Item-oriented analysis involves looking at item A and asking, “How can item A be improved?” The result is item A+, a modified version of item A; for example, trying to improve a bicycle may lead to a motorcycle (See Figure III-8).

Value management involves looking at item A and asking, “How can the basic functions of item A be provided with a better value?” The result is item B, which sometimes is a completely different item. For example, if one of the basic functions of a bicycle is identified as “roll faster,” the result will still be a motorcycle, but if the function is “move faster,” item B could be an airplane (See Figure III-9).

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The discipline of function analysis requires that a function be described by using an active verb and a measurable noun; adding an adjective often is helpful in identifying the problem being addressed and communicating the information outside the team. Certain verbs should be avoided—such as “provide,” “satisfy” or “meet”—because they convey abstract concepts that are difficult to qualify and do not contribute to the understanding of the function under study. The noun used should be easily quantifiable. Passive statements are typically avoided because they do not lead to action whereas active statements can easily be translated into tangible actions. This can often be accomplished by using the noun as a verb and looking for a more specific and precise noun to describe the functions, as shown below:

Passive: Active:
Provide support Support weight
Seek approval Approve procedures
Develop exhibit Exhibit products
Increase attraction Attract clients
Ensure protection Protect users

The traditional function analysis systems technique (FAST) diagram is versatile. In addition to its original uses for improving the function analysis and creativity phases of value engineering, it can be used as a general purpose problem-solving tool with a wide range of complex problems. FAST also helps to improve communication and motivation, is objective, and provides a balanced approach between high-level function concepts and the task to be performed in order to implement those concepts.

Originally, the function analysis systems technique (FAST) was used to obtain cost reduction by simplifying and improving identification of the basic functions. FAST and other types of function diagrams’ applications have now expanded to cover a diverse range of complex problems such as building construction, design-to-cost (DTC), motivation and incentive programs, medical diagnosis, systems analysis, procedure writing, management planning, and communications improvement. As time passes, even more applications appear likely for functional diagrams.

In integrated value management, the goal of function analysis is to identify, compare, and classify the functions in order to build a benefits-oriented model of the program or function-oriented model of the project scope. It is a variation of the Customer-FAST diagram that the author calls benefits breakdown structure (BBS) for programs and function breakdown structure (FBS) for projects in reference to project management’s work breakdown structure (WBS). This type of model can, in turn, be used as a cost model with both cost and worth information in the pertinent blocks on the diagram, and is particularly useful when developing a business case because it links investment to expected benefits/functions.

The Function Analysis Process

Function analysis is usually carried on through one or more workshops in which the key stakeholders actively participate. Participants in this phase will include the client or sponsor representatives involved with the program or project concept, development, execution, and use; needs and objectives are defined and discussed by the whole team so that the function or benefits breakdown structure is endorsed by every participant. The job plan used by the author to conduct the function analysis workshop is based on the methodology described in the European Value Management Standard (BSI, 2000). The method is divided into five steps, as follows:

  1. Identifying and listing the functions
    • – Describe object of study using functions (creative thinking)
    • – Define interaction and adaptation functions (environment analysis)
    • – List all functions using a verb-noun statement
  2. Organizing the functions
    • – Develop Function Breakdown Structure
  3. Characterizing the Functions (Can be combined with quality modeling (Kirk, 1994))
    • – Transform qualitative functional expectations into quantitative performance expectations
    • – Define measurement criteria and expected level of performance
    • – Define acceptable tolerance levels
  4. Setting the functions in a hierarchical order
    • – Prioritize functions in order of relative importance to achieve purpose of project or program
    • – Prioritization factors reflect the viewpoint of the key stakeholders or customer
  5. Evaluating the functions
    • – Set a relative value weight on the hierarchical order (not to be confused with function cost, which only focuses on the cost aspect)

Notes:

In smaller or less complex projects, steps 4 and 5 and cost-worth model are often skipped.

In larger projects or programs, I personally prefer to do step 3 after 4 and 5 so as to avoid spending too much time characterizing functions of lesser importance to the ultimate objective.

If the value study is integrated with the project, the output of this phase is a list of prioritized and characterized functions, a function breakdown structure, and if the data are available, a quality model and cost/worth model. Function analysis provides the basis for the scope definition, as well as cost and quality planning. In the European method, the process is generally followed through with a document called the Functional Performance Specification (FPS). The FPS describes the need (project output or program outcome) in functional terms, without any reference to specific solutions; it includes evaluation criteria for each of these functions.

The results of this phase will be used for budgeting purposes and to build the program benefits breakdown structure or the project work breakdown structure. During the function analysis workshop, the team can also address issues of organizational structure and procurement as well as validate or establish a target cost and milestone schedule.

Benefits Management Strategy (Program Management)

More specifically for program management, where functions refer to expected benefits, the function analysis phase is modified as follows:

  1. Identify benefits
    • – List expected benefits using verb-noun statement (creative thinking)
    • – Define direct and indirect interactions (stakeholder analysis)
  2. Organize benefits
    • – Build benefits breakdown structure (BBS)
    • – Agree and prioritize critical success factors
  3. Characterize benefits
    • – Define key performance indicators for each CSF
    • – Define measuring criteria, targets, and acceptable tolerance

This phase typically leads to the Business Case for the program and leads to the creation of a blueprint of that describes the expected situation at the end of the program.

Identify Functions/Benefits

For a well-trained mind, a product is not an assembly of elements, but an assembly of functions.

Robert Tassinari (1985)

The first step in any project is to identify its purpose; the purpose is usually defined by the sponsor, users, and other key stakeholders. In a program, the purpose is defined at the strategic level, either as part of the portfolio or business strategy. Stakeholder management is an essential input of the function or benefit identification process, as it helps define who the key players are. The objective of this process is to identify the functions that the project outputs should fulfill or the benefits that the program should provide.

Traditionally value analysis and value engineering have relied on the team’s experience to identify functions in an intuitive way; a perfect solution, as long as the sought functions were technically oriented. With the evolution of value management to provide a more customer-oriented focus, the use of this technique alone is no longer satisfying since “experience has proven that [intuitive analysis alone] will enable the team to identify only about 50% of the functions” (Tassinari, 1985). Many techniques have been developed over the years to specifically identify the functions of a project. Many practitioners combine creativity techniques with function or benefit identification techniques in order to ensure full coverage of the matter at hand and get stakeholder engagement.

Howard Ellegant uses a “Customer Attitude Survey” to identify the project’s customer-oriented functions; he relies on a three- to four-hour “Focus Group” to define their acceptance criteria and rank them (1995). Likewise, marketing and customer surveys can be useful tools to kick start this process. In Europe, value practitioners use the interaction method that analyzes the impact of the product, and its reactions to its external environment; this method ensures a comprehensive identification of functions and a strong stakeholder focus.

Intuitive Research

This method identifies functions, based on an individual or team’s collective experience and knowledge of the issue. This is the traditional value engineering method. It is often conducted as a brainstorming session and is an iterative process that is repeated as the function diagram is developed.

Interactors Method (Environment Analysis)

With the current project and program focus on stakeholder and benefits management, this is, in my experience, the most important phase of the function identification process because it establishes the scope context.

In this method, all the external elements that interact with the product are identified as its environment; these elements are called interactors. The next step is to methodically determine all the functions created from the adaptation of these interactors to the product and vice versa. Functions that exist between the interactors because of the product also should be noted; they are the interaction functions. For example, the need to ground a metal construction is evident when analyzing the relationship of lightning to the ground through the product. Figure III-10 shows the interactors’ method concept and Figure III-11 displays the example of interactors’ analysis on an office chair.

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In strategic program management the interactor analysis is replaced by the stakeholder analysis and follows the same rules. Adaptation functions define those benefits that directly affect a stakeholder; interaction functions describe benefits that arise from the interaction of different stakeholders through the program outcomes. For example, employees may expect better work conditions from an organizational change (adaptation), and management will want to involve employees in the change process to ensure that the change will be successful (interaction).

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Product Analysis

The few techniques described next specifically concern the analysis of products and systems. They are mostly used for technical projects when they are in the design or development phase, but variations can be used in other circumstances.

Sequential Analysis of Functional Elements (SAFE)

This technique originated in the United States. Its objective is to identify all the different sequences of a product’s life-cycle or use cycle; next, all functions derived from the performance of that product in its environment during its use sequence are identified.

Analysis of Activity and Stress

The logical extension to sequential analysis is to analyze the product’s activities during use in order to identify both permanent and temporary stress to which it will be submitted. Functional requirements are then defined accordingly; for example, a product may have to withstand transportation over rough terrain and must therefore be able to resist severe shocks, or a building may have to withstand severe weather and should be built accordingly.

Comparative Study

This method consists of analyzing functions performed by one or more existing comparable products (including the competition’s) and to identify essential, unneeded, and merely interesting functions that had not occurred to the team. The product will be improved with the addition of new functions, so long as it is not assumed that technical functions are essential when they are not.

Analysis of Codes and Regulations

Products must incorporate functions required to meet applicable codes and regulations. These may vary from one domain and/or area to another, and their early identification ensures that the cost to meet these codes and regulations will be considered and optimized. The industry or the client’s technical benchmarks should be considered on the same level.

Model Analysis

The concept behind this method is to build a model of the product to reexamine each component or element in respect with the function(s) upon which it depends. This procedure is especially useful in the design phase of a project to eliminate costly components or elements that do not respond to an identified function and might have been added during design without reference to the previous function analysis.

Business Analysis

When the aim is to identify the expected strategic benefits deriving from a change that affects the business, individual techniques will often be combined into a more holistic method. Below are a few of the best-known methods for achieving a good value profile of the expected change. The chosen method will depend on the client organization’s culture and requirements; its purpose will be to create a value profile of the business after the change.

SWOT (Strengths-Weaknesses-Opportunities-Threats) Analysis

Analyzing the strength and weaknesses of an organization or department is not directly related to the analysis of expected benefits or requirements, but is helpful to understanding the context of the VM study. Opportunities are directly linked to benefits, and threats are limitations to the achievability of the expected objectives. SWOT constitutes a good context analysis that can trigger a list of expected benefits that the client organization is seeking.

See also: http://en.wikipedia.org/wiki/SWOT_analysis

Balanced Scorecard/Strategy Map

The balanced scorecard, initially developed as an analysis and measurement tool, is now used to plan and develop strategies. One of the main advantages of the balanced scorecard is that it forces the team to look beyond pure financial benefits into areas like customer satisfaction, internal business processes as well as learning and growth performance; its drawback in the use of strategy maps is that it limits the analysis to these four main components. The strategy map is a framework to elicit expected benefits and can be used in conjunction with other functions/benefits identification techniques.

See: http://en.wikipedia.org/wiki/Strategy_map

Logical Framework

The logical framework is a popular technique with international aid agencies and the UN; it is also used by the Australian Government. The logical framework describes four types of events that drive projects: Activities, Outputs, Purpose, and Goal. The objective is to create a logical cause-effect relationship between these elements to ensure that activities are linked to goals. Again, this is a framework that can be used to generate expected benefits (outputs and purpose) in a program or project.

See also: http://en.wikipedia.org/wiki/Logical_framework_approach and http://www.ausaid.gov.au/ausguide/Documents/ausguideline3.3.pdf

Soft Systems Methodology (SSM)

The soft in soft systems methodology refers not to the system, but to the method. Contrary to hard analysis methods, SSM assumes that each stakeholder has a different view of reality and that these views should be discussed before reaching an agreement. Typically, it asks of a group of stakeholders to agree on a new view of the world on which they agree and then compares this view to reality to identify desired and feasible changes (expected benefits). It can be useful to engage stakeholders in a common view of a complex situation and its expected outcomes.

See also: http://en.wikipedia.org/wiki/Soft_systems_methodology

Requirements Elicitation

In 2005, the International Institute of Business Analysts (IIBA) issued their first Body of Knowledge. In the 2009 edition, a whole chapter was dedicated to requirements elicitation. The guide describes a number of elicitation techniques that can be used to elicit requirements from a group of stakeholders. Among them are creativity techniques, focus groups, observation, requirements workshops, and surveys, among others. Requirements elicitation is an essential step to identify expected benefits from the group of stakeholders that will be affected by, or involved in, the program or project.

See also: http://en.wikipedia.org/wiki/Requirements_elicitation and IIBA Body of Knowledge.

Organize Functions (FAST Diagrams and Benefits Maps1)

FAST diagramming is an art rather than a science—but when properly applied, it’s an art that reveals, as nothing else can, ways to improve value because through logic it stimulates our imagination and creativity.

James E. Ferguson Jr., American Value Specialist

After having identified functions or expected benefits, the value management team will organize them into a coherent model; the resulting weighted function diagram or breakdown structure is often called the value profile. Typically function identification and function organization are conducted jointly and iteratively in one single workshop with all the key stakeholders.

The organization of functions/benefits enables the team to verify the completeness of the function identification process and to draw a clear picture of the product, project or program’s functional scope. It relies on three steps.

  1. The first step is to develop a core function diagram or benefits map, by identifying function relationship in response to the “why,” “how,” and “when” questions. This first pass is effective in structuring the project or program scope and clarifying the objectives. It is usually done with the participation of the key stakeholders to get their buy-in and engage them.
  2. The second step is function expansion. This process enables the identification of additional functions and helps in the preparation of function diagrams or benefits maps. It consists of methodically expanding the draft function diagram by asking three questions: Why do you verb-noun? How do you verb-noun? When do you verb-noun? Each question will be answered by a new functional statement (verb-noun) or confirm that the functions already identified are valid.
         The question “why” confirms the higher-level function or generates a new higher-level function, and the question “how” confirms or generates a lower-level function; the question “when” is optional. It enables the team to verify the completeness of a group of functions by creating a sequence of actions that answer the question “why.”
  3. The final step is to gain agreement on the function diagram or benefits map from all the key stakeholders. The final function diagram represents a graphical, structured representation of function relationship in response to the “why,” “how,” and “when” questions and enables the team to finalize the scope of the project or program. It is very effective in verifying the completeness of the function identification and helps identify functions that are not always obvious.

In strategic level workshops, executive managers, because of time constraints, may not have the time to participate in the whole workshop. If this is the case, the second step is done with only a core team, which creates a straw-man (final draft) version of the function diagram that is presented to all the stakeholders in a final workshop session. The core team should be open to challenge of the straw-man version as the ultimate objective is to get final agreement from all the key stakeholders, which can only be achieved if they “own” the final result.

Characteristics of Function Diagrams and Benefits Maps

There is no “correct” function/benefits model to compare with a text solution, but there is a ”valid” function/benefits model. Because the model is not complete until it has the approval of the participating team members and reflects their inputs, its validity is directly dependent on the degree of participation of the team members, as well as the depth and breadth of representativeness they have.

Function diagrams and benefit maps are a good representation of the scope of the issue at hand and outline the specific relationships of all functions/benefits with respect to each other. They also help distinguish basic function(s) or critical success factors (CSFs) from functions of lesser importance and ultimately increase the probability that all functions or benefits have been identified and listed. Like a WBS, function diagrams and benefits maps provide a basis for simplifying the total list of functions or benefits, eliminating those that are unnecessary and combining others that are necessary.

Function Diagrams and Benefits Maps Applications

Business Case

What is the problem? What is the issue? What are the objectives? Why is a solution necessary? How can the solution be accomplished? How can the objectives be achieved? Asking these questions about the proposed project or program enables the team to get a good understanding of the overall purpose and its solutions. The function diagram or benefits map helps clarify the root purpose; break large complex issues into manageable, specific objectives to be achieved or problems to be resolved; and provide a balanced approach between the overall, high-level aspects of the purpose and the actions required to address it.

As such, it helps establish the relationship between the investment strategies and/or proposed projects and programs by defining their expected business benefits (CSFs) and clarifying their outcomes. Eventually, it helps define the benefits timeframe (short-medium-long term) and expected return (financial and others), as well as clarify outputs (new capabilities) and estimate resources.

Creativity

The function diagram and benefits map uses “how” questions to stimulate creative thinking and thereby generate alternatives for each function of the lower levels. As such, it fosters creative solutions and innovation. The “how” questions are future-oriented; i.e., How can it be done? How can it be improved? Therefore, alternatives tend to be disconnected from the past in order to look at opportunities.

Communication and Engagement

Function diagrams and benefits maps provide a good basis for communication and engagement. They represent a collective view of a situation and of its expected outcomes. Ultimately, when roles and responsibilities are assigned on the basis of each function, they let people know what is expected of them, why it is important, and, within limits, how they should perform the task. The graphical representation is conducive to communication of complex situations.

Construction of a Function Diagram

To begin constructing the function diagram, intuitively identify a function that the group considers important and ask “why” and “how” questions about that function. Start by looking at the functions that have been identified in the previous step of the process to find answers. If you do not find an appropriate function among those that have been previously identified, agree on an answer with the group. Each answer should be in a verb and a noun format and, as stated above, the verb should be an action verb, and the noun should be measurable.

The “why” answer should be placed to the left of the function, and the “how” answer should be placed to the right of the function. When necessary, functions can be ordered vertically in a time sequence starting at the top with the first function of a sequence and at the bottom with the last one (See Figure III-12).

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When asking the question “how,” it is common for participants with less experience to quickly get to a task or activity statement instead of a functional statement; although this is ultimately the objective, it is best to delay this task-based rhetoric as much as possible in order to keep options open for innovative ideas.

Functions that do not have a time-sequence relationship should be shown below or, in some cases, above a particular function in a horizontal line of functions. If the function happens at the same time and explains or elaborates another function, it should be placed below the horizontal path function. If the function occurs all the time, it should be placed above the horizontal path function at the extreme right of the diagram. If there are specific design objectives, they should be placed above the basic function and shown as dotted boxes. The scope of the study is shown with two dotted lines on the right and left. Higher-order function, or desired output, will lie to the immediate left scope line. The basic function always will lie to the immediate right of the left scope line. Any function supplying input to the problem, but not really part of it, should be outside the right scope line.

Function Diagram/Benefits Map Components

Scope of the problem under study: Depicted as two vertical dotted lines, the scope lines bind the problem under study.

Highest-order function(s): The objective or output of the basic function(s) and subject under study is described as highest-order function(s) and appears outside the left scope line to the left of the basic functions. In business terms, it is the purpose or ultimate goal of the strategy, program, or project—the vision.

Lowest-order function(s): Functions to the right, outside of the right scope line, represent the expected deliverables or results; they are often expressed as task or activity statements.

Basic function(s): Those function(s) to the immediate right of the left scope line represent the mission or strategy of the subject under study. In business terms, these are the critical success factors (CSF) that will define the success of the strategy, program, or project.

Concept: All functions to the right of the basic function(s) describe the approach elected to achieve the basic function(s). They represent the expected outcomes of the program or outputs of the projects.

Objectives or specifications: Objectives or specifications are particular characteristics or restrictions that must be achieved to satisfy the highest-order function; they are not in themselves functions. (Note: The use of objectives or specifications is optional.) These are also called parameters; they are typically set through an achievability or risk analysis and define the boundaries of the program or project under study defined by management decisions.

FAST Functions: The following four types of functions are specific to the FAST diagramming technique and are not used in customer FAST and function breakdown structures. (See below for types of function diagrams)

  • Critical path functions: Any function on the “how” or “why” logic path is a critical path function. This concept is particularly interesting for project and program managers as it defines a functional critical path in parallel to the time-critical path. The function critical path focuses on the successful delivery of the project’s key results.
  • Supporting functions: Supporting functions exist to achieve the performance levels specified in the objectives or because a particular approach was chosen to implement the basic function(s).
  • Dependent functions: Starting with the first function to the right of the basic function, each successive function is “dependent” on the one to its immediate left.
  • Independent (or supporting) function(s): Functions that do not depend on another function are located above the critical path function(s).

Activity: The method to perform a function (or group of functions).

Types of Function Diagrams and Benefits Map

Since Bytheway introduced the function analysis systems technique (FAST) diagramming method in 1965, many practitioners have devised their own versions of FAST. Ten years later, two of them had been used the most extensively and successfully by practitioners: the technically oriented (technical) FAST (Figure III-13) and the customer-oriented (task) FAST (Figure III-14). In 1975, a five-day seminar/workshop was held at the University of Wisconsin-Madison, and its focus was on combining these versions. Participants included C. Bytheway, T. Snodgrass, T. C. Fowler, and W. Ruggles, among others. To the surprise of the organizers, the members of the committee agreed unanimously that each form of FAST had a definite application. Both are presented here, along with the conclusions of the committee.

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Basically, one can state that the technical function analysis systems technique (FAST) applies best to existing products when one begins with an input, whereas task FAST and function breakdown structure (FBS) should be used for designing new products, starting with a task or need.

The Technical FAST works best on components that are part of a total product or design because the scope lines restrict the team or individual to the specific component. It also works better on an existing product analysis because you don’t have to start with the higher-order function or task (the user or customer need).

The advantage of the Task FAST is its ability to describe complete products or designs with one diagram. It also is more suited for new products to be designed because it insists on the customer concerns and always starts with a task (user or customer basic need).

The function breakdown structure (FBS) (Thiry, 1997) evolved from the Task FAST and is mostly destined to functionally define new products or services. It is developed from an analysis of the customer needs and defines measurable or assignable functions that will be used for design. This is typical of a project initiation process; the author has often used FBS to define a project scope and frame the charter. It does not necessarily include the customer concerns or functions of the Task FAST but is based on customer function identification. It is built very much in the same way as a task-oriented work breakdown structure (WBS), in the sense that all the components of the project are contained at every level. The FBS is built only to the level of detail needed to measure the function the next levels down typically represent the project deliverables. Functions on a same level should be totally independent from each other, similar to the elements of a WBS. If the environment analysis has been used to identify functions, function groups usually will correspond to interactors.

Since then, the author has developed the concept of the benefits breakdown structure (BBS) that is based on the assumption that, for a strategy or program, functions are, in fact, expected benefits that the strategy or program should deliver to the business (Thiry, 2004). The same rules apply for the BBS as for the FBS. Figures III-15 and III-16 show two different approaches of the BBS. In the first, the approach is pure value management, labeling benefits as functions independent from solutions; this allows for more innovative solutions when looking at project deliverables. The second example takes a more results-oriented approach where benefits are immediately tangible; this approach is more popular with sponsors, because it offers easy tangible solutions and makes sense more easily, but it also offers less opportunity for innovation.

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Characterize Functions/Benefits

Ultimately, the functions are measured to create a project worth (NOT/MORE) that corresponds to the maximum overall resources expended to fulfill the customer’s needs, objectives, and targets. The concept of function characterization involves the establishment of units of measure (criteria), by which the functions will be evaluated, along with the expected level of performance (worth) of each function, and the upper and lower limits of acceptance (flexibility). This establishes the benchmark according to which the function will be measured.

For example:

Function: Support Weight Maintain Temperature
Criterion: Mass Temperature
Target level: 80 Kg 20°C
Tolerance: ±10 Kg ±2 °C

In the case of strategy or programs, the same method is used to establish measures for the key performance indicators (KPI), but the rhetoric is a business one.

For example

KPI (Function): Integrate Business Infrastructures Improve Mobility and Flexibility
Deliverable: Maximize interface with legacy systems Access system from different devices
Criterion: % of integration Number of devices
Target Level: 95 % 3
Flexibility -5% 0

Key Performance Indicators (KPIs) and Criteria

Criteria are used to define the type and unit of measurement by which the customer or sponsor will judge or appreciate the performance of the product or system. Standard product quantitative criteria are mass, temperature, speed, volume, consumption, distance, or radius, but other less measurable qualitative criteria can also be used, such as ease of maintenance, durability, versatility, aesthetics, or color. When dealing with customer-oriented functions, one must be more sensible and be able to use more subjective units of measure.

In the case of a strategy or program, KPIs will refer to business measures of performance like: client satisfaction; knowledge improvement; increased collaboration; system efficiency. Criteria will refer to specific measures for each KPI, such as number of repeat contracts, percentage of employees certified, integration of collaboration platforms, and reduction of number of complaints.

There can be more than one measure for each KPI and there are always more than one KPI for each CSF, since CSFs have a higher level of abstraction because they are at a higher level on the Benefits Breakdown Structure.

Target Level

The target level is the measure of the expected performance against which alternatives and options will be judged or assessed later in the study. This reference can be established according to codes and regulations or to industry standards or, again, to less-substantial concepts established by the client or sponsor. It is the value practitioner’s job to question the client or sponsor in order to agree on a translation of subjective client/sponsor statements like comfortable, pleasant, not too loud, for products; or customer satisfaction, better collaboration, flexible business performance, and so on for business, into tangible specific measures.

Tolerance/Flexibility

Once the criteria and level are agreed on, a tolerance range must be established in order to fix the lower and upper acceptable performance limits. Again, the client or sponsor will be the judge, and the value practitioner must be their guide. Some characteristics may have a zero tolerance range for performance acceptability. The characteristic either is met successfully, or the product is not acceptable, e.g., the specific red color of a Ferrari cannot be a different shade of red. In business, tolerance should be balanced with achievability. If the program or project team does not have the necessary resources to achieve the level of tolerance, it should be discussed before undertaking the program or project.

Prioritize Functions/Benefits

The methods of ranking functions are very similar to those used to rank ideas in the ideation phase. C. Fallon (1965 - Combinex Method), D.H. Stafford (1995), and others have devised very sophisticated methods for ranking ideas and functions. French value practitioners promote a simple subjective method of ranking with a one to five coefficient: (1) useful, (2) necessary, (3) important, (4) very important, and (5) essential. Many other value practitioners, like S. Kirk and H. Ellegant, for example, also promote the use of a simple method like this one for ranking functions (Smith, Hinchman, and Grylls, 1993; Ellegant, 1995).

More sophisticated methods are not necessarily worth the effort when ranking product functions. But because benefits are typically not as tangible as product functions, key stakeholders need to buy-in to the ranking process to validate the classification process. It is the author’s experience that, when ranking benefits, more elaborate methods (paired comparison or weighted matrix) are more effective, mostly in terms of acceptability by the stakeholders. (See weighted matrix discussion in validation/elaboration phase section for examples of paired comparison and weighted matrix; also discussed in Chapter IV).

Weigh Functions/Benefits

Rating the functions is the final step leading to the ideation phase after identifying, organizing, characterizing and ranking the functions. For example, in value engineering, the cost of each function is estimated in order to direct the creativity phase toward the functions that have the most cost optimization potential. This task is very easy to accomplish when the study concerns optimizing an existing product. The product’s components are put on one side of a matrix and the functions on the other side; the total cost of the product is then distributed among its components, and the cost of each component is distributed among the functions it fulfills. The goal is not to assign an exact cost to each function but rather to get a comparative assessment of each function’s worth.

As more new fields of practice are opening to value management, many value practitioners are not limiting their ratings of functions to cost only. Quality, time, human resources, risks, communication, and whatever other data will be determined by the customer’s needs are also used. A good example of this is quality modeling developed by S. Kirk of Smith, Hinchman & Grylls (SH&G) (Kirk, 1994).

In program management, the worth of a function can be associated to the prioritized critical success factors; those functions that proportionately contribute most to the top CSFs will be the ones the team concentrates on. In project management, the same can be done using the main deliverables and their impact on the successful completion of the project. The weighted BBS is sometimes called the value profile (OGC, 2010) as it expresses the relative contribution of each expected benefit to the portfolio, program, or project’s purpose.

Function Worth

In summary, worth is the minimum acceptable ratio of performance against expenditure of resources. When a product is being studied, the goal is to allocate resources for each function according to the proportion of the global cost needed to fulfill this particular function. When the study concerns new product development or the existing product is not satisfactory, the task consists of assigning to each function the minimum estimated expenditure of resources required to fulfill it at an acceptable level. This is a subjective procedure whereby the exchange value is judged by the team.

A reference model (worth model) can then be created for future comparison of alternatives, for example, a base building or system that performs in an acceptable manner but does not have any non-essential features. The cost of the alternatives generated in the ideation of elaboration phases will be compared to this worth model in order to calculate the value index and identify cost/worth mismatches. Value index is the monetary relationship (ratio) of function worth to function cost, where the highest value is one.

The value study’s objective is to seek the course that will generate the greatest benefits for the least resources. Most benefits can be expressed in terms of money but many cannot. Non-monetary benefits include aesthetics or image, expansion potential, functional relationships, flexibility or versatility, safety or reliability, reduction of environmental impact, political considerations, and sales and marketing. It is important to consider those non-monetary benefits during the study, particularly when allocating measurement units to functions.

Ideation

All Human Development, no matter what form it takes, must be outside the rules; otherwise, we would never have anything new.

Charles Franklin Kettering, English Inventor

In Search of the Solution

The ideation phase consists of producing the greatest possible number of ideas in a short period of time. Practitioners should remember that the value management process is based on creative thinking, which involves alternative use of the left (creative) and right (rational) sides of the brain. During the ideation phase, there is no room for judgment; think creatively, then evaluate critically.

The first step is to put together a team of creative individuals. Collectively, creative teams provide:

  • A good mix of people with no major power relationships.
  • A positive attitude; a belief that the program, project or product can be improved.
  • An open communication mindset and a capacity to remove mental blocks.
  • Free-flowing idea generation with the ability to think with no logical sequence.
  • And remember that all great ideas may seem absurd when first proposed.

Individually, creative individuals possess:

  • Motivation and persistence of drive.
  • Flexibility in thinking and an ability to abstract.
  • Sensitivity to the problem.
  • Originality and openness to change.
  • Tolerance to ambiguity.

Ideation can be used in many stages of the process; it can address any of the following elements:

  • The problem or situation itself.
  • Interacting problems or opportunities.
  • Potential solutions/actions
  • Achievability factors: financial, parameters/constraints, human/people and complexity.
  • Threats and opportunities.
  • Stakeholder engagement.
  • Implementation issues.

Creative Thinking Applications in Value Management

Creative thinking is a product of the imagination where a new combination of thoughts and things are brought together.

Lawrence D. Miles (1972)

Whereas many creative or innovation techniques promote total freedom in the ideation process, the author’s experience shows that in value management it is more effective to have some direction in the creative process. The application of Pareto’s Law suggests that 20 percent of the functions or elements of a problem count for 80 percent of the resources expenditure. Therefore, it is a loss of time and energy to concentrate on the 80 percent that count only for 20 percent of the optimization potential. In an iterative value process like integrated value management, the team will reevaluate the importance of functions or elements before each workshop because the preceding action will have changed their relative importance.

Certain guidelines can be given as to which items should be prioritized in a value analysis or value engineering creativity session:

  • Items with high immediate or life-cycle resource expenditure;
  • Continuous or repetitive resource expenditure;
  • High-risk items with undefined criteria;
  • Code or regulation associated items or constraints that appear unreasonable; and
  • Items with high cost/worth ratio and above-average user complaints.

In a strategic workshop, the team will concentrate their efforts on the critical success factors (CSF) that have the greatest weight to identify potential actions or deliverables.

The team leader should ensure that the environment stays creative, enabling ideas to thrive during the entire ideation phase. For that matter, they should encourage “creativity synergists” and discourage “creativity inhibitors”; they must also beware of “road-blocks” or “idea killers.”

Creativity Synergists

Some circumstances—such as discontentment with the status quo and curiosity, motivation, and perseverance—create a favorable setting for creativity. Others include competition and necessity; no constraints or “sacred cows”; ignorance of the past; originality, open-mindedness, and flexibility; liberty to advance ideas without criticism; effective interdisciplinary communications; good human relations, respect, and recognition; working with peers; and strong management support and participation.

Creativity Inhibitors

Other factors create a negative environment for creativity; they include rigid and unbending rules, unwritten guidelines, fear of failure or of ridicule, contentment with status quo, negative comments or roadblocks, judgment, bureaucratic processes involving red tape, and intimidating superiors or colleagues.

Roadblocks

Roadblocks are statements that cut ideas short; they stifle idea association and endanger the creativity process. They are usually exploited by people who exercise influence. Value management practitioners should be aware of them and keep them out of the workshop. Here are 25 typical “idea killers:”

  1. It’s not realistic!
  2. Why change it?
  3. It’s been working for 25 years!
  4. This is not the right time.
  5. It’s not part of our mandate.
  6. It would be too difficult to manage.
  7. Let’s form a committee!!!
  8. We would have to change
  9. It’s a stupid idea!
  10. It will never work…
  11. It’s a good idea, but…
  12. It does not apply to us.
  13. We have already thought about it!!!
  14. Let’s wait a little more…
  15. It will cost too much.
  16. Management will never agree.
  17. We’ve already tried it.
  18. It doesn’t correspond to standards!
  19. We’re already too far…
  20. We’d have to start all over again.
  21. We don’t have time.
  22. Have you thought of the consequences?
  23. Think about security.
  24. It’s technically impossible.
  25. No, you can’t!

Form

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Validation/Elaboration

Seek the Best, not Perfection.

Stephen J. Kirk, American Value Specialist (1994)

This phase can be divided in two sub-phases: validation or evaluation and elaboration or development.

Don H. Stafford (1995) very thoroughly described the different evaluation options offered to the value study team in his article, “The Judgment Phase—More Than One Way to Skin a Cat,” which is the main source for this section.

The purpose of the validation phase is to identify and select the best ideas for further development. It is a fact that the team does not have enough time to develop all of the good ideas; therefore, the workshop process must focus on the best ideas for development in order to achieve the best value. Efficiency in adequately developing those ideas that have the most merit is as important as their development. The team and leader must determine a methodology to identify the best ideas in a time-efficient fashion.

Experience indicates that three criteria appear again and again in the evaluation of ideas:

  1. The inherent value of the ideas;
  2. The expected financial gain or cost savings; and
  3. The likelihood of the sponsor’s acceptance.

One of the objectives of the validation is to set limits on the number of ideas to be developed. The team should first segregate ideas, identify priorities, and then separate ideas to be developed from ideas to be discarded. Segregation of ideas involves dividing the ideas into different categories. In value engineering or value analysis, four groups of ideas are typically identified: ideas that diminish resource expenditure; ideas that avoid resource expenditure; ideas that improve project performance; and ideas that increase resource expenditure but still result in better value.

In strategic value management, ideas are scored against the critical success factors to identify those that contribute most to the strategic objectives.

Ranking/Prioritization

Ranking focuses the team’s effort on ideas that should be developed first. It may also separate ideas that the team will develop from those it will try to develop only if there is enough time. Most importantly, a line must be drawn to separate those ideas to be developed from those which will be discarded. This requires proper application of the combined judgment, knowledge, and experience of those drawing the line.

Prioritizaton criteria can vary from a simple “accepted—rejected” to more sophisticated weighted matrix methods with a number of variables. Again, the time allocated to development and the type of study will decide which path should be chosen. Typically, simple methods can be used at a technical level where accurate information is easily available, whereas in the case of strategic workshops where choices are subjective, more sophisticated methods are used to formalize the evaluation process.

Selection

The first rule of selection is to eliminate all ideas that do not have obvious reasons to be kept for development. Once this rule is set, the team will establish the rules for selection and ranking of the ideas to be developed and then will choose a method of rating ideas.

Each idea kept for development will have a “champion” who will believe in that idea and lead its development. If an idea does not find a champion, it is eliminated. Unfeasibility of the idea within the scope (time, cost, and so on) of the project can be a good argument to reject it, except if it is an idea with so much value that it is worth changing the project parameters. If it is established that there is no chance for an idea to be accepted by the sponsor or customer, there is no sense in pursuing it.

Basically, there are three selection/ranking methods available to choose those ideas that will be kept for development; each has advantages and disadvantages. They are: leader decision, majority decision, and consensus.

Ranking/Prioritization

Simple Rating System

There are basically two approaches to the simple rating system.

The first is a system using an alpha or numerical rating from one to five (1, 2, 3, 4, 5 or E, D, C, B, A), one to seven (1 to 7 or G to A) or one to ten, with A, five, seven or ten representing the best and one (E/G), the worst. Many practitioners prefer a five or seven-point scoring system that offers enough latitude for judgment while, at the same time, limiting discussion and does not have a middle (neutral) point. Experience indicates that with this system, especially ten points, it is difficult to prevent the team from wasting time debating small rating differences in the ideas. Agreed verbal statements to accompany the score help the team make a clearer choice, for example:

1 = Useless; 2 = Desirable; 3 = Useful;
4 = Important; 5 = Essential.

In terms of the decision, 5 or A and 4 or B indicates that these ideas will be developed; 3 or C means that these ideas will be developed if the team has enough time; 2 or D suggests that although these ideas have some merit, they will not be developed by the value team (optional); and 1 or E indicates that these ideas have little merit and, therefore, should not be considered.

The second system is a simple pass/fail system that usually is expressed by “accepted” (A) or “rejected” (R). This system is useful in technical workshops where potential ideas have a clear impact and cause-effect relationship. Many practitioners use a “to be developed” (D) label when a decision cannot be made based upon the available data.

List of Advantages/Disadvantages

This method consists of establishing the advantages and disadvantages of each idea and then comparing them to each other. It is very effective when examining alternatives to an existing product or design when data are available, but it is less useful for a new product or project. It also is less objective when ranking functions.

Weighted Matrix

The weighted matrix method typically requires four steps to accomplish: (1) select evaluation criteria; (2) assign relative weights to criteria; (3) evaluate each alternative against the criteria; and (4) compare and select the alternatives offering best value. This method is the most sophisticated of all evaluation methods, and it can be used with many variations. Practitioners are encouraged to explore this process to find the optimal variation for his own needs. This method will be discussed further in Chapter IV.

  1. Select Criteria
    It is best to limit the number of criteria between five and eight, with a maximum of twelve; the selection of the criteria is important to validate the process. Each criterion must be independent from the others and specific to the project or program under review. In program management and strategic management, these criteria are typically the critical success factors (CSF).
        Only criteria that have significant impact for the sponsor or customer should be used. When using functions as criteria, avoid technical criteria that are too specific. Letters work much better than numbers for identifying criteria because there is no rating attached to letters.
  2. Assign Criteria Weights
    If only two or three criteria are to be used, it is relatively simple to attach an appropriate weighting of the criteria. When more criteria are being considered, the weighting is assigned using paired comparison or pairwise comparison, a method by which criteria are compared to each other two at a time. Different methods can be used to conduct a paired comparison; the traditional method consists of labeling the different criteria with letters (A, B, C, etc.) and building a matrix with each letter in both row and column. A comparative score is then given to each criterion in comparison to each of the others (see Figure III-17).
        If there is no significant difference between the criteria, both letters are entered into the cross square and they score 0; otherwise the letter of the dominating criterion is entered into the square. The evaluator determines the level of preference; the weighting number (typically 1 to 3) is then entered into the square following the letter. The scores of each letter are then added and the criteria weights are then calculated proportionally in percentage. For optimal objectivity, the calculation of the weights should not be done until after the evaluation of alternatives has been completed. For greatest effectiveness, the weighted evaluation process should be a “blind” process.
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    In Chapter IV, I will describe another type of paired comparison method that I use for more strategic applications.
  3. Evaluate Alternatives
    Evaluation of the alternatives is accomplished by measuring the performance of each idea or alternative against the criteria developed during the previous process. The weighted matrix is a common tool for this evaluation (see Figure III-18). Ideas will be given a score of 0 to 10 where 0 is Useless; 2, Desirable; 4, Useful; 6, Important; 8, Necessary; and 10, Essential. As each score may vary from individual to individual, it is important that the customer/sponsor be represented during this phase or at least has the opportunity to review and comment on the scores in order to ensure their buy-in.
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        In the case of trade-offs, each potential alternative has to meet the customer’s minimal requirements and the expected quality and the resources needed to attain it must be balanced.
  4. Select Alternatives
    Before making the final selection of alternatives, the team quickly reviews the results of the evaluation for any obvious distortions or discrepancies and may readjust the score accordingly. The basis for this decision is a combination of the professional judgment of the leader and the team members as well as the sponsors’ requirements. The team will assess the time available for development to select ideas to be developed further and to determine the order in which they will be developed.
        The chief advantage of this method is that, when properly executed, it is the most thorough of all methods. It is most useful when there are a relatively small number of options to be evaluated, and the relative merits are either not clearly obvious or not developed to a sufficient degree to permit selection of the best alternatives by one of the faster methods.

It is a very valuable method when evaluating projects at the planning stage or when evaluating strategic alternatives on the basis of a range of business factors. In that case, the alternatives are fairly high-level and do not require extensive technical data to assess or compare. The method is also useful when a few of the options need a wider business-level evaluation, even though a majority of the alternatives may be selected by another method. It is more appropriate in lengthy studies and provides the best documentation in complex cases or when changes may be expected along the way.

Its disadvantage for product-based projects or system-based programs where technical or historical data are available is that a great deal of time is required to gather enough data to thoroughly evaluate each alternative. It is also less useful on short studies and on studies in which a wide range of alternatives are desirable.

Delphi Method

The Delphi method was developed at the RAND Corporation, a nonprofit U.S. global policy think tank, in the 1950s. It consists of experts anonymously evaluating ideas on an individual basis in a series of cycles until consensus is reached. The objective is to obtain a true consensus with the least possible compromise due to group influence.

This method can be useful to develop new product lines or new strategic thinking, since the process is very similar to the iterative development process and enables identifying risk areas and potential optimization alternatives without the power games that are usually parts of these processes. However, as for the weighted matrix, it should be used on a limited number of ideas and only when the problem under study is well defined; otherwise, it can be very time consuming.

Selection Methods

Leader Decision

The leader decision approach casts the team leader in a dictator role. The decision is based on his or her sole judgment and experience, as input from other team members is not included in this type of judgment process.

There are, however, some advantages. First, it is very fast. With an inexperienced team, it circumvents a time-consuming process, as team members learn while performing the judgment. Also, if the sponsor has specific focus issues, it ensures that they stay in the foreground and maximizes the time for idea development. Of course, there are disadvantages as well. It does not provide for incorporation of the knowledge and experience of the entire team and can result in the final solution missing some good ideas. It requires a very strong leader, particularly if the team members are experienced in value methods. There is also a high risk of the team bailing out because they lack ownership of the solution.

Leader Decision with Discussion

A variation of the leader decision technique adds a second step consisting of the discussion and review of the decisions. Decisions are allowed to be challenged by team members who feel strongly about it; the leader keeps the last word, but additional information is gained from this challenge. Another way to achieve this is to ask each team member to review the ideas in his or her expertise area. Proposed changes are discussed briefly, but the final decision is still made by the leader.

An advantage of this method is that it includes the element of team member experience, allowing input from the technical expertise of the entire team, and it increases the quality of the selection process. If the sponsor has identified a specific focus, it ensures consideration, and it still provides significant time for idea development. This method allows team members to spend time in a very efficient fashion, providing input to edit, rather than create, the initial judgments. The disadvantages are that this technique requires a strong leader and takes more time than both the leader decision and the voting process.

Majority Decision

The first step of the majority decision approach is the determination of how many votes are required for an idea to be developed. The second step consists of voting for those ideas deemed to have merit. Each team member is given an equal number of votes, normally one half to three quarters of the total number of ideas that can be developed. The team should be instructed to vote following these guidelines: no more than one vote per person for an idea; vote for the ideas that are best for all disciplines; vote independently of the other team members; and vote in your discipline first. The cut-off point is determined based on the number of ideas the team can develop.

This method is very fast; it combines speed with input from the entire team. It is particularly useful when conducting short-duration studies and when the issues are relatively straightforward. At the same time, its disadvantage is that it offers little opportunity for interaction among the team members.

Voting With Discussion

The voting with discussion methodology is a modification of the voting process; it adds a discussion step. If discussion is conducted before the vote, each idea is debated briefly with no more than two individuals permitted to make comments in favor of, or against the idea. If discussion occurs after the vote, it is limited to those ideas that someone feels have been wrongly judged. The after-voting discussion is more efficient in terms of time required.

Among this method’s advantages is that it combines speed with input from the entire team and is particularly useful when conducting short duration studies. Its main disadvantage is that it provides only limited documentation of the selection process.

Consensus

The consensus methodology is either a one-step or a two-step process: discuss and rate ideas (Delphi method, for example) then check against production capacity and re-rate if needed. There are two important decisions to be made before using this method: which selection method to use for dispute resolution and which rating system to use. Regardless of which selection method or rating system is used, the technique encourages input from all team members. The total number of ideas selected for development must still be balanced against the development capacity of the team.

This approach is particularly effective when the team focuses quickly on the salient issues in the discussion. It is most applicable in longer workshops and is very valuable when important sponsor priorities exist but are not easily defined. When sponsor representatives are present in the workshop, this is probably the most effective methodology for incorporating sponsor input into the judgment process.

This method’s main disadvantage is that it takes a lot of time to properly accomplish consensus; judgment takes place in an environment of free discussion that can easily get out of hand.

Interestingly, a study by Holloman and Hendrick in 1972 demonstrated that consensus after majority vote is the most effective method in terms of time, quality, and satisfaction with the decision (Vennix, 1996). In this case the team takes a majority vote to choose the options and subsequently tries to arrive at a consensual decision. Experience shows that, when using VM, consensus is fairly easy to achieve, as it is a logical conclusion to the process, and when votes need to be taken, there is usually little discussion or conflict.

Conclusions

Each of the methods above possesses strong and weak points. The degree of applicability of each varies with the study duration, skill level and personality of the team leader, and the complexity of issues at hand.

In terms of prioritization, the weighted matrix method combined with a voting with discussion or consensus is best for longer workshops in which a comprehensive recommendation is required. In most other cases, the 1 to 5 simple rating system combined with the voting with discussion method is a good compromise between efficiency and effectiveness.

It is recommended, though, that one bear in mind that all of these methods are valuable only if they relate to the sponsor’s needs. Value depends on quality, schedule, and functionality as much as on capital cost and life-cycle cost.

Validation/Elaboration

The elaboration phase of a value study is the prelude to the decision or recommendation. The stated objective of this phase is to convince the sponsors that the proposed alternatives are worth implementing. In the case of strategic alternatives, this phase would be equivalent to the feasibility assessment stage of the business case. The elaboration phase also examines proposal implementation by developing the scope of the alternatives that have been identified as worth pursuing in the previous phase.

In order to favor implementation, it is useful at this stage to remind the team of the customer or sponsor values or objectives. In the case of integrated value management, it is advisable to reconsider or revalidate those objectives, since they might have evolved during the course of the project or program. It is also advisable to identify the true decision makers and what their specific expected benefits are.

Classifying and Estimating Proposals

Before any other step is undertaken, value management proposals are classified by trade, component, element, function, critical success factor, or any other explicit system compatible with the sponsor’s objectives. All similar value management proposals are grouped and/or combined. Only the distinctive ones are kept as is; all those relating to the same concept are considered as duplicate and combined, or eliminated. The goal of this step is to minimize the number of proposals and eliminate repetition.

In order to choose the value management proposals that will be presented to the client, and considering that a thorough selection has already taken place in the previous phase, the most important issue at this stage is the implementation potential of the proposals. In program management, a full achievability analysis of each proposal will be undertaken; in simple projects, this assessment is based on a simple resource evaluation (time and cost vs. scope and quality); in more complicated or significant projects, a full risk analysis can be undertaken for each proposal.

Proposal Development

In order to optimize the number of proposals that can be studied and presented to the client, these studies are detailed only to the minimum required to enable the decision makers to make an informed decision. More than one alternative can be suggested for each proposal in order to give a choice of options to the stakeholders in consideration of issues at hand. On the other hand, the value team must beware of presenting too many proposals or options, thereby diluting the significance of each of them.

At the project level, each proposal is supported by a detailed technical analysis. The value management proposal will be compared to the actual situation or expected performance objective; if the objective cannot be reached, reasons will be provided. At the program level, the analysis will consist of identifying the key benefits or deliverables of each proposal and assessing them against the program’s critical success factors.

Costing

At this stage, all cost assumptions will be validated and documented by the team’s cost experts. Life-cycle costs will be calculated for each value management proposal and used to compare each option. Savings or increases in costs will be identified. In the case of strategic programs, it is not always possible to estimate costs accurately and the team will therefore rely on a mix of financial and non-financial factors like technical or management capability improvements to make their recommendation. It has to be understood that costing is at the most an accurate estimate. It does not reflect the actual cost of the final solution, but is used as a comparative method to help decision makers compare options against each other. Therefore, it is important to agree on and use the same cost evaluation method for all options; the actual method is a choice of the decision makers, but consistency is key.

Identification of Constraints

Constraints and conditions of implementation are addressed for each value management proposal and option. The range of constraints and conditions are the same for all proposals. Comparisons must be made on the same assumptions that are to be documented. All constraints pertaining to the value management proposal (ethics, codes, regulations environment, legal issues, and so on), as well as conditions of implementation (redesign, delays, increase in capital cost, change in cash flow, quality, and so forth) should be documented and assessed; mitigation methods can also be determined as part of the value study or in a separate risk study.

Financial Feasibility Study

For each proposal, the value study will determine the expected return on investment, internal rate of return, net present value, payback period or other prescribed financial assessment method. The team will perform a risk/benefit analysis by assessing the expected risks versus the expected benefits. These can be monetary or non-monetary, but the measurement unit must be the same for both the risk and the benefit.

Recommendation and Decision

Customers buy benefits, not features. […] Buying is a highly subjective, personalized process of determining relative value.

Gregory D. Githens, 1996 (p. 13)

The presentation and recommendation phase’s objective is to demonstrate the overall potential value increase that the study has generated for the project or program, as well as that of each individual proposal. The value team’s recommendations and implementation conditions are presented to the stakeholders for their approval and final decision on implementation.

Recommendations You Can’t Refuse

It is advisable to decide the format of recommendations before developing the proposals in order to be able to focus on the elements that are relevant to the chosen type of presentation.

Identifying the Target(s) (Who)

The team identifies the key stakeholders that should attend the presentation of the proposals. These stakeholders must have the power to make decisions (authority over the resources required to implement them) and typically form the project or program steering committee or governance board. The value team will envisage and outline the ways in which the implementation of proposals will benefit both the executive and the management levels.

Reviewing the Objectives (Why)

In view of the results of the study, the value team will review the objectives that have been identified at the beginning of the study and that have been reexamined regularly during the study. They will assess their current relevance and modify the perspective of the value proposals, if necessary. These objectives will be presented as a way of introduction in order to remind everyone of the issues at stake.

Presenting the Conclusions (What)

The presentation of conclusions should be SMART (Specific, Measurable, Achievable, Relevant and Timely); executives especially have limited time availability and appreciate short and direct presentations. Recommendations should be specific and contain a summary of the expected benefits for each specific stakeholder. Selection criteria—both monetary and non-monetary—as well as achievability and implementation conditions are discussed as part of the presentation of each proposal.

Recommending Solutions

During the sensemaking phase, the team listed potential areas of impact for the study; they assessed risks associated with the implementation of those results, confirmed quality expectations, and explored partnering issues. Surprises will be greatly reduced during the implementation process if this procedure has been iterated throughout the study by integrating project/program management and value management, for example. The recommendation will also include a preliminary risk analysis, thereby easing the value management proposal implementation.

Each value team member will be given the task of persuading management of their respective group to endorse the value proposals. As recommended above, it is advisable to get the members of the steering committee or governance board to attend the presentation in order to obtain commitments on the spot. For that reason, an implementation plan must be prepared and an implementation “champion” has to be identified during the presentation.

The Implementation Plan

The first step of the implementation plan is to identify the individuals responsible for implementation; usually, it is the project/program manager’s role. The team will aim to secure that individual’s commitment to implement the value management proposals as well as a commitment from management to support them. The implementation plan will provide for effectively planned tasks and activities throughout the project management process; approval and control points should be established through a sensible milestone schedule. An implementation success measurement method and report process will be included in the plan. Targeted value procedures can be planned in case of deviation from the plan.

Types of Presentations

Reports

Written reports are the evidence that remains after the flare is gone. They should be well-organized and cover the value study process in detail. There are basically two types of reports: management reports and detailed reports. A typical table of contents is presented here for both types of reports.

Management Report

  1. Executive Summary
  2. Background of Project (goals, expectations, parameters, constraints, and so on)
  3. Objectives of the Value Study

    3.1. Reestablish Goals

    3.2. Restate the Problem

  4. Summary of Proposals
  5. Benefits
  6. Recommendations
  7. Implementation Plan (including implementation conditions)
  8. Conclusions

Detailed Report

  1. Introduction

    1.1. List of participants

    1.2. Agenda

    1.3. Job Plan

    1.4. Outline of Value Study Process

  2. Classification of Value Management Proposals (VMP)
  3. Summary of Value Management Proposals
  4. Detailed Value Management Proposals grouped by function/element/component

    4.1. List of proposals

    4.2. Detailed proposal

  5. Annexes

    5.1. Complete list of ideas from creativity phase

    5.2. Backup for estimates, life-cycle costs, quality, risk assessment, and other supporting evidence

    5.3. Supporting material (plans, technical specs, standards, regulations, and so on)

Audio-Visual

It is always advisable to use visual aids to enhance the presentation of proposals but they should not be considered an end in themselves. They should allow for questions and answers and help drive the main points of the recommendation as well as trigger clarification questions.

Verbal

There is always a need for a verbal presentation to the client. Each “champion” usually presents their recommended proposals and discusses them. Managers are usually busy and have limited time; therefore, the total presentation should not last more than one-half hour to one hour. The presentation should be organized accordingly and priority given to the proposals with the most value and/or implementation potential. Verbal presentation is organized into three steps: identify subject (objectives and conclusions); present in detail, listing pros and cons; and repeat and emphasize conclusions.

Mastering

As defined in Chapter II, mastering involves a continual process of monitoring and realignment as circumstances evolve. It is required mostly in complex and turbulent environments where agile methods are the norm and business benefits are the ultimate objective.

Value management requires follow up of implementation as a minimal effort, but when value management is truly integrated and the ultimate objective is to see value realized, mastering also involves an ongoing effort until the agreed benefits are achieved satisfactorily. This chapter covers follow-up of implementation. Chapter IV will cover the more integrated processes.

Follow Up of Implementation

In modern VA [value analysis], Implementation is step one. […] Implementation rates of a properly conducted VA study are typically very near 100%.

Theodore C. Fowler, American Value Specialist (1990)

It is usually not the role of the value team or the value leader to implement value proposals, but too often in the past, value practitioners have neglected implementation and satisfied themselves with a “potential” value gain rather than an actual value realized. In today’s competitive market, however, value practitioners must follow up on the value proposals of the value study. Typically, the value team will support the following stakeholders during implementation.

The Sponsor

Sponsors might need to reassess a proposal against their needs. If their needs evolve during the program or project, the value practitioner will help them restate them. Every proposal should bear a benefit for the recipients and should consider their capability to implement it.

The Program or Project Manager

The value practitioner will assist the program or project manager in the evaluation of the value of change proposals. They will attend the program or project team meetings and answer questions about the value management process and the proposals. Sound value management proposals should create opportunities for the program or project manager and help minimize problems and risks.

The Designers

If value proposals involve additional design or redesign this should be accounted for. Ideally, the value practitioner should support them and help with the development of new proposals. Each proposal that affects the quality of the design (functional or technical) should be reviewed and approved by the designers.

The Operations and Line Managers

Operations are usually the recipients of the proposals and will need to integrate them into their business as usual operations. The value practitioner will help them develop a sound transition process and will help them assess the reliability, maintainability, availability, and operability of each proposal.

The Marketing Team

The value team will ensure that the proposals will improve the product’s marketability and help the marketing team if required.

The Users

The users (consumers) care about usability, flexibility, and social acceptability, all which should be considered. The users’ needs should be included in the sponsor’s needs.

The ultimate objective of the value team must not merely be to make “good” recommendations, but rather to help the execution team achieve “real” value.


1In this section I will refer to Function Breakdown Structures and Benefits Breakdown Structures as “Benefits Maps.”

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