10
Investment Planning Template
This chapter uses an example based on the truck fleet management system. The objective of the Investment is to reduce fleet operational costs.
A first reaction to this planning template may be that it conflicts with the Agile philosophy of less planning time to get something out there more quickly, like the philosophy of Lean Canvas. Investments constitute major expenditures in larger organizations, and it is not easy to free money for experimentation. The CFO wants to manage risk. If you are in an organization where they will fund a multimillion‐dollar Investment to determine if there is a market, good for you. However, most of you will need to show that your Weighted Shortest Job First (WSJF) estimate justifies priority within the backlog one‐year Work in Process (WIP) limit. If you have a case where experimentation is warranted, then propose it as a strategic Investment offset by any amount of revenue that it might generate.
The backlog one‐year WIP limit frees product management and engineering time to do the level of planning required to complete the template. The one‐year Investment backlog WIP limit reduces wasted planning effort, and product managers aren't chasing this week's whimsical priority. Interruptions for sales requests are reduced because they must be justified based on Net Cost of Delay as well as development cost. The backlog is much more stable because it takes solid justification of a better opportunity to dislodge a planned Investment. A product manager can now leave functionality details to the product owner, allowing them to do high‐value planning. The Investment template reflects exactly what product managers should be spending their valuable time on.
If you are an engineer, you may view the Investment planning template as “product management's job” and skip it. In the new world of Investment planning, engineering is involved from the start to influence the product. The information in the template provides insight for engineering into how the product is justified, which can impact functionality. A recurring theme of this book is that engineering needs to step up to understand basic financial principles that determine product success or failure.
10.1 Investment Description
A name for the Investment is provided. In this case, the name is “Fleet Operational Cost Reduction.” The template provides a concise description and quantification of the overall objectives. The first objective is expressed in terms of what your business expects to achieve from this Investment. It is “Increase product income by 20% within three years.” The second is the value to be delivered to the customer. In this case, it is “Reduce annual fleet operational costs by 15%.”
10.2 Proxy Business Case
This is likely the most valuable section for B–B companies. Put yourself in the seat of a customer evangelist that sales has managed to cultivate. At some point, the evangelist is going to have to internally justify the price.
As a CEO of a startup company developing a clinical trial management system, I found it challenging to sell into the conservative life sciences industry. I realized it was not difficult to find customer advocates for new technology. Many loved our new technology. The problem was that they couldn't sell it within their own organizations. I realized that the major focus of our sales effort should be on providing an internal advocate with the information they needed to build an internal business case, hence, the proxy business case.
It involves some time, but I would argue that one must know how the purchase decision will be made in a target market to effectively sell into an organization and to price the offering. Product managers need to know the product stakeholder values of the decision‐makers and influencers because the road to financial approval goes through them. The proxy business case also provides a framework to focus marketing on what is most important to the decision‐makers.
The proxy business case requires an analysis of the operational cost components of your customers. I have no experience in the trucking industry (which is probably obvious to any of you in the industry). Information was easy to find on the web. I found a report produced by the American Transportation Institute [1]. It provided the components of the marginal cost per mile in the United States from 2011 to 2019. The relative cost contributions in Table 10.1 are based on this report.
The report estimates average marginal cost per mile in the United States at $1.55. The average trucking company in this market segment incurs about $2M per year in operational costs. Information at this level of detail may not be publicly available in your industry. However, these types of reports can be purchased from industry analysts at a reasonable cost.
Table 10.1 Trucking industry marginal costs.
| Component | Operational costs (%) |
|---|---|
| Fuel | 40 |
| Truck/trailer lease or purchase payments | 15 |
| Repair and maintenance | 10 |
| Truck insurance premiums | 3 |
| Permits and licenses | 2 |
| Tires | 2 |
| Tolls | 2 |
| Driver wages and benefits | 26 |
| Total | 100 |
Table 10.2 Target annual cost reductions for new routing algorithm.
| Component | Cost ($K) | Reduction (%) | Savings ($K) |
|---|---|---|---|
| Repair and maintenance | 200 | 10 | 20 |
| Truck insurance premiums | 60 | 5 | 3 |
| Tolls | 40 | 10 | 4 |
| Total | 27 | ||
The Investment team has come up with a way to reduce the cost components listed in Table 10.2 with novel routing algorithms. Stop and go traffic will be avoided where possible to reduce wear and tear on trucks. An algorithm routes trucks around high‐traffic accident areas or alerts the driver to use extreme caution within areas with high accident rates. Engineering developed an algorithm to find optimal routes that account for tolls and per mile costs. Savings are based on average annual operational costs of $2M.
The Investment can reduce the operational costs for an average customer by $27K per year. This will help derive the pricing model determined as part of the Go‐to‐Market plan addressed in another section of the Investment planning template. How much would a customer be willing to pay to save almost $30K per year? And these savings are for an average customer. Larger customers will save more. This tells the Investment team that they may consider some form of tier‐based pricing.
This example demonstrates the deeper thinking facilitated by the proxy business case. Product development has come a long way from adding features of questionable value to adding cash to the customer's bottom line. The analysis helps limit functionality because features must be justified in terms of their contributions to customer cost savings. Your evangelist is armed with the information they need to gain support for the purchase.
10.3 Product Stakeholder Analysis
Stakeholder analysis should have been completed before starting the Investment template. Hopefully, your organization has maintained a library of product stakeholders and constrainers relevant to your industry, as recommended. The template section includes only those stakeholders impacted by this Investment.
10.3.1 Customer Product Stakeholders
Table 10.3 Fleet Operational Cost Reduction Investment external product stakeholders.
| Stakeholder | Values |
|---|---|
| VP operations | I want to reduce operational costs |
| Maintenance director | I want to reduce maintenance costs |
| Safety director | I want to minimize accidents to reduce our insurance premiums |
10.3.2 Internal Product Stakeholders
Table 10.4 Fleet Operational Cost Reduction Investment internal product stakeholders.
| Your company | Values |
|---|---|
| Sales rep | I want to perform an intriguing product demonstration that results in a next step with the customer |
10.3.3 Constraints
No external constraints have been identified in this case.
10.3.4 Competition
Feature list comparisons have traditionally been used to benchmark the competition. This usually ends up with a heap of new features for engineering that “we must have, too.” Huge R&D investments are often made to replicate these features without regard to value. Recall the discussion on great products. It is about a substantial increase in an important product stakeholder value, not the number of features.
Instead of a feature‐by‐feature comparison, we want to identify how competitors address the same stakeholder values addressed by this Investment to ensure we have a competitive or better alternative (see Table 10.5). The competitive value table will identify opportunities for significant differentiation and potential weaknesses that can be addressed by the Investment.
Table 10.5 Competitive value table.
| Product stakeholder | Value | Competitor A | Competitor B |
|---|---|---|---|
| VP operations | I want to reduce operational costs | Driver utilization reporting | Does not address |
| Safety director | I want to minimize accidents to reduce our insurance premiums | Routing algorithm avoids high accident and high traffic areas | Alerts when driver exceeds maximum hours |
| Maintenance director | I want to reduce maintenance costs | Not addressed | Heavy focus on maintenance costs. Maintenance intervals based on wear and tear |
| Dispatcher | I want to minimize the time from when an order comes in until it is on the way | Claims that they have the most efficient dispatch algorithm | Does not address |
10.4 Acceptance Criteria
An acceptance test plan is included to show how the Investment team will verify that the Investment has met its objectives. It must be an executable test plan with details on test setup, procedural steps, and data validation. In this example, it might include 10 test runs in different traffic scenarios to log brake usage, or the team may create a simulator to perform hundreds of trials based on traffic data across many different cities.
The acceptance test plan will also facilitate a deeper discussion of test functionality that may impact features and functionality. In this case, it showed that additional effort needs to be included for the simulator.
The test plan forces agreement on what “done” means for the Investment.
10.5 Go‐to‐Market Plan
10.5.1 Pricing Model
The proxy business case can also provide insight into pricing. In this example, the software vendor has been pricing software on a release basis with annual support and maintenance costs. The proxy business case calculated recurring financial value for the average customer of $27K per year. The Investment team decides it would be best to release this Investment as an optional modular upgrade that would create average recurring revenue of $15K per year per customer. They decided on tiered pricing levels for small, medium, and large markets of $10K, $15K, and $20K to attain the average of $15K.
10.5.2 Deployment Model
This application is hosted by the Investment team's IT department, so deployments will be internal upgrades.
10.5.3 Sales Channels
Their current sales and partner networks are capable of selling the Investment. Otherwise, this section would identify how sales channels will be developed to meet the Investment income targets.
10.6 Investment Targets
This section provides data to support the initial WSJF calculation used to determine if the Investment is within the one‐year backlog WIP limit. Note that features are not expected to be broken out at this point. The Investment team will have flexibility to decide on features that contribute directly to income projections.
10.6.1 Development Cost
State the estimated development cost and the estimation model used. In this case, top‐down decomposition into epics was done to arrive at an estimate of 2400 story points. The Investment team estimates 800 development hours based on a conversion rate of three story points per hour. The Investment cost target is $120K based on an average labor cost of $150 per hour.
Note that a story point to hour conversion for an entire R&D organization is not practical because each team defines its own point scale. Investments should be small enough to be developed with a single Agile team, so the story point scale is determined by a single team.
10.6.2 Cycle Time
The Investment team estimates a cycle time of two months based on a projected velocity of 300 story points per week.
10.6.3 Income Projections
Prior to getting to the Investment template stage, the Investment team would have determined the minimum sales commitment to justify a WSJF value that places it within the one‐year backlog WIP limit. The downloadable Investment Income Profile Calculator was used to come up with a target based on a sales profile and target payback period. Sales is not committing to this revenue at this point. They are just saying that it appears to be realistic. The forecast is updated in Section 10.6.3.2 if it is still within the WIP limit after detailed planning, which establishes the minimum sales commitment to proceed with development.
Note that if features are added before the Investment is developed, sales would need to justify higher income to maintain the same payback period and WSJF priority.
10.6.3.1 Revenue Target
A target payback period of three years was established by the team's CFO. The team talked with sales to come up with a minimum revenue growth curve as shown in Table 10.6. The high growth rate is expected because each sale adds recurring revenue.
Table 10.6 Fleet Operational Cost Reduction Investment revenue growth profile.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|
| 100% | 150% | 300% | 600% | 1200% |
The income profile was calculated based on the estimated development cost of $120K using the downloadable Investment Income Profile Calculator spreadsheet (see Table 10.7).
Table 10.7 Fleet Operational Cost Reduction Investment income profile example.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|
| $22K | $33K | $65K | $131K | $262K |
Note that the income from the first three years totals the development cost of $120K to achieve the three‐year payback target.
At an 80% margin, the income profile required to justify the Investment is as follows (see Table 10.8):
Table 10.8 Fleet Cost Reduction Investment required revenue example.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|
| $27K | $41K | $82K | $164K | $327K |
10.6.3.2 Number of Sales
This section estimates the minimum sales required to ensure that sales meets its revenue commitment.
Each sale adds income of $15K per year based on the recommended pricing model. There must be a minimum of 1.8 sales that start generating income at the beginning of the year to meet expected revenue. The sales will generate $27K for each year because it is recurring revenue. In general, the sales added each year must be the prior year's sales plus the difference between the years. For example, Year 2 must add $41K − $27K = $14K, which is a minimum of 0.9 sales (see Table 10.9).
Table 10.9 Minimum sales commitment.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
|---|---|---|---|---|---|
| Minimum sales | 1.8 | 0.9 | 2.7 | 5.8 | 10.9 |
10.6.4 WSJF
The income difference between Years 2 and 3 is $82K − $41K = $41K. The Investment Cost of Delay based on income moved out of the three‐year planning period is $41K/12 = $3.4K per month. A cycle time of two months establishes a WSJF value of 3.4/2 = 1.7, which keeps the Investment within the one‐year WIP limit.
10.7 Assumption Validation
This is another gem I picked up in my career. I don't understand why it isn't used by all companies. Shouldn't you have some way of validating critical assumptions before investing millions of dollars? Investments provide a good vehicle for assumption validation.
I first heard about assumption validation when I was a director in an R&D division of Lucent Technologies, formerly the telecommunications product development and manufacturing division of AT&T. Lucent encouraged cross‐division benchmarking of product development and quality practices. I visited the communication products division in Denver responsible for business phone systems. They had introduced a process where assumptions had to be “tested” before products were developed. An engineering director told me, “Engineering must do extensive testing to show that they are correct. Shouldn't product management have to do the same?” That resonated with me. Product failures can often be predicted if critical assumptions are tested.
This Lucent division had applied validation assumptions prior to investing in the development of product called “DocFon” in 1992, an interactive voice and document communications device. Among their assumptions were that the device could be sold at a price of $3000. They created a complete brochure to show to a predetermined number of customers to validate pricing. The test plan specified how the brochure would be presented to potential customers and the number of customers by region that needed to be involved.
It turned out that the price most customers were willing to pay was less than the manufacturing price of $1200. The drop‐off beyond $1200 was quite severe. They wisely decided not to build the product.
One year later, HP introduced a similar product at a price of $2600. It was discontinued because sales were poor even with discounts up to $1500. Imagine the total cost of this error that could have been prevented by formally validating assumptions.
My next encounter with the concept was a great book a friend recommended to me called Lightning in a Bottle: The Proven System to Create New Ideas and Products That Work [2]. Here are a few quotes that resonated with me:
Various people, including senior management, come up with ideas. Senior management lobs incoming ideas into the organization because there aren't enough good ideas coming from anywhere else.
Ideas that flow from the top are often implemented without proper evaluation. Why? Because until now there has not been a reliable process to evaluate ideas.
The book recommended a similar approach based on testing critical assumptions.
I had my own experience with a near failure. As CEO of the clinical trial management software company, I had a “great idea” to develop “Biotech in a Box” based on Microsoft SharePoint, which was just becoming commercially successful. We would set up a biotech with all the Standard Operation Procedure (SOP) templates necessary to perform a clinical trial. It's not hard to get a lot of people to love your idea when you are CEO, and any people who question the idea are often branded as naysayers. It's not good for a career to criticize the CEO's idea in some companies.
I forced myself to put the love I had for my own idea aside to validate critical assumptions. One key assumption was customers would be willing to pay a monthly fee that would more than offset the SharePoint hosting costs. We created a test plan, including research on hosting costs and contacted a number of small biotech companies to determine how much they would be willing to pay. It turned out that the price would not cover the hosting costs. We abandoned the idea.
There is an argument that validating assumptions like this limits innovation where customers at first don't recognize the value of an idea, and if you “build it, they will come.” My response is to do the analysis. Go into negative mode and encourage everyone to think of why this may not be a good idea. Validate the assumptions. Now, go ahead with what you believe is an innovative solution with an understanding of what you need to overcome. The assumption validation exercise may identify problems that you may be able to “innovate around.”
Here are some assumptions that might be validated for the trucking example:
- Assumption
- ○ Maintenance cost reductions can justify the purchase price.
- Test
- ○ Obtain maintenance cost estimates from customer contacts in small (<50 trucks), medium (50–200 trucks), and large (>200 trucks) market segments in the United States. Obtain data from at least 10 customers in each region. Average costs must be at least 80% of the estimate of $2M per year.
Note the specificity of the tests, down to the minimum sample sizes, and the regions. The objective is to not have your conclusion challenged later:
Well, how many companies is this based on?
What about Asia?
Yes, this is some work at the front‐end planning stage, but, as we pointed out, the product manager will have more time for planning with the Investment approach. And avoiding millions of dollars from a failed product justifies the product management effort.
10.8 Summary
- A proxy business case ensures that your product can be justified by your customers in B–B models.
- Information for detailed planning is often available on the web. If not, studies can be purchased from industry analysts.
- Listing stakeholder values addressed by the Investment helps focus functionality and the value contributions of features.
- A value‐based competitive analysis provides opportunities for major product differentiators for the Investment.
- A basic Go‐to‐Market (GTM) can provide insight into pricing as well as other capabilities your Investment needs to include.
- Investment income, cost, and cycle time targets are updated in the planning document to determine current position within the one‐year backlog WIP limit.
- Critical assumptions should be validated with tests to avoid product failures.
References
- 1 Williams, N. and Murray, D. (2020). An Analysis of the Operational Costs of Trucking: 2020 Update. American Transportation Institute.
- 2 Minter, D. and Reid, M. (2007). Lightning in a Bottle: The Proven System to Create New Ideas and Products That Work. SourceBooks, Inc.