This is an early draft of stories used to explain Business Value. We might try to get them published. This is a very early draft. The "Tale of Two Stories" is two sets of stories. The first shows traditional approach and the second, the business value approach.
Business Value : A Tale of Two Stories
Gary works in the accounts receivable department of an Electricity Supplier. One day, he approaches his boss, Tom the CFO, with an idea.
Gary: “Tom, I reckon we can save $2m dollars a year on bad debts where customers go bankrupt.” said Gary.
Tom: “Sounds good. Tell me about it.”
Gary: “Last year, we lost $10m in bad debts. I reckon we could save 20% of that if we had a ChaseUp system to identify anyone more than 10 days overdue. I reckon it would cost $1m to build giving a net profit of $1m.”
Tom: “Go and ask Bob in IT to check your costs.”
Two days later, Gary and Bob meet with Tom to discuss the results.
Bob: “We can do it for three quarters of a million. There is a nice package just out from GrabITquick that should fit the bill.”
At this point, there are two scenarios. The traditional approach and the business value approach. In both, Bob would spend a couple of weeks gathering more information and putting it together into a more detailed estimate.
The Traditional Approach:
Tom: “Right Bob, sounds like it might be a winner, go and prepare a more detailed estimate. Lets present it to the board.”
Two weeks later, Gary and Bob present Gary’s idea and Bob’s estimates to the board. Bill the CEO starts the questioning.
Bill: “That sounds good. Bob, your numbers look good. What are the risks?”
Bob: “Main one is getting the right developers to integrate GrabITQuick into our existing accounts package. The job market’s quiet and there are lots of good people around, so I’m not too worried.”
Tom looks through the plan “Lets see, Software, Developers, Support, Training, erm, What about hardware?”.
Bob: “Ah, I forgot about that, we should add fifty “K” for a couple of linux servers.”
Bill: “Tom, what do you think of the savings?”
Tom: “Well Bill, Gary has worked in accounts for fifteen years and knows the business backwards. I’m confident they are right.”
Bill: “Lets go for it then!”
The Business Value Approach:
Tom: “Right Bob, sounds like it might be a winner, go and prepare a more detailed estimate. Lets present it to the board. Gary, take a look at this article from Cutter and prepare me a business value model.”
Two weeks later, Gary and Bob present Gary’s idea and Bob’s estimates to the board. Bill the CEO starts the questioning.
Bill: “Thanks guys. Bob, I think you might want to add something for hardware into your estimates. Gary, tell me about this model that Tom is so excited about.”
Gary: “Well, I read the cutter article and realised that you were about to spend one million dollars on my say so. This made me a little uncomfortable. Bob said he would be spending about 5 days on the estimates so I spent a similar time on the model.”
Gary: “I spoke to Debbie in the debt recovery department and told her about the idea. She suggested I speak to someone she knew in a local Business School about default models.”
Gary: “The business school were very helpful. My original model was very simplistic. Its obvious now, but there is probability of default for each grade of customer, not only that, but defaults cluster in certain years. In order to work out how much we would lose, we would need to run a simulation. One of their students put together a spreadsheet for me. They told me that I needed to find out the credit grades of each customer and the related probability of defaults, the exposure to each customer and our recovery rate for bad debts. Anyway the result showed that over a ten year period we have a 50% chance of losing $5m each year and a 10% chance of $50m without the GrabItAll software. We re-ran the simulation assuming a new recovery based on using the GrabItAll software. It showed that we would have a 50% chance of losing $4.5 million but a 10% chance of losing $20m.”
Bill: “I do not like the idea of running this model that a student built.”
Gary: “Its not as bad as it sounds. The student is on a year out from an investment bank. Also, the Business School were quite excited about it. Ten of their students and a professor spent two hours pulling the model apart before agreeing to it. So I’m fairly comfortable with it.”
Bill: “OK, but what are these default probabilities?”
Gary: “The default probabilities came from Moody’s and Standard and Poor’s. Both are well established rating agencies that are used by Wall Street.”
Bill: “Who gave you the recovery rates?”
Gary: “Debbie in accounts. However she said that she would need two additional staff to run the new process which would cost two hundred thousand a year. We put these numbers into our new model.”
Bill: “Well it sounds like the original idea doesn’t hold up. The saving is only five hundred thousand a year with a 50% probability. Tom, what about the other number?”
Tom: “I see what you are saying Bill. Fifty million lost revenue could seriously put us in jeodpardy with our Loan covenants. We will be fine with twenty million.”
Bill: “Great work Gary. OK everybody, lets do the project and focus on protecting ourselves from the fifty million loss. Lets make sure we get the 500 hundred thousand as well but it is secondary.”
Gary: “One other thing about the model”
Bill: “What’s that Gary.”
Gary: “We should update it everytime we find out new information, and we should re-evaluate it every month to find out if the conditions change. It should only take a couple of hours to update the spreadsheet. We should also re-evaluate the project decision every time the estimate goes up.”
Bill: “Sounds good. I’ll assume everything is fine unless you let me know otherwise.”
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And there are many ways in which the model can be improved, or its results evolve. For example,
* If the credit worthiness of a company changes, its credit rating may be updated by the rating agencies.
* Credit card companies use different classifications to group customers in credit ratings. Rating agencies are only useful for large companies.
* Alternative sources of probability of default information exist such as the credit derivative market.
Break it Down I
The stories now show the results of breaking the business value down rather than leaving it as a single value to be claimed by the whole project. Two stories.
Bob, Gary and Debbie meet to discuss the project plan.
Bob: “Gary, What is the most important feature?”
Gary: “We need to be able to track which customers have paid late and chase them up.”
Bob: “Right, we can install the GrabItAll software for you to start configuring as the first release. We will then build the interfaces between the accounts system and GrabItAll. Once we have the data in we will build the reports.”
Gary: “What about costs?”
Bob: “$300,000 for the GrabItAll license, $50,000 for hardware, $200,000 for the interfaces, $100,000 for reports, and $100,000 for training.”
Gary: “When will we be able to start using it?”
Bob: “Should be ready in 6 months time. But that assumes we have no problems or scope changes.”
Gary: “What about configuring the software? Who will do that?”
Bob: “Debbie needs to do that.”
Debbie: “Can’t I have a spreadsheet instead?”
Gary: “Not if you are going to keep track of one thousand outstanding debts at one time.”
Bob: “GrabItAll has a spreadsheet extractor but it will take about a month to set up.”
Gary: “Can we speed it up and cut the costs?”
Bob: “We could use the other workflow package we looked at but that would only save us about $100,000 on the license and we would have to spend an extra $50,000 to $100,000 to build an excel link because it does not come with one as standard.”
Gary: “Lets get on with it then.”
Break it Down II
Bob, Gary and Debbie meet to discuss the first iteration of the project.
Bob: “What should we do first?”
Gary: “As you know, Debbie and I have broken the business value down onto the following story cards.” Gary spread out four index cards.
Identify customers who are 1 day late with a payment. 35%
Future payment profile of late paying customers. 30%
Future payment profile of top 20 exposures. 20%
Workflow to chase up late payments. 15%
Bob: “Thats interesting, they do not match the costs. Look.” Bob added the costs to the stories.
Identify customers who are 1 day late with a payment. 35% $20,000
Future payment profile of late paying customers. 30% $40,000
Future payment profile of top 20 exposures. 20% $40,000
Workflow to chase up late payments. 15% $700,000
Bob: “Why has the work flow got such low value? I thought it was key.”
Debbie: “When we initially looked at the benefit it was based on recovering as much as possible. Our real benefit is to capture a few big exposures rather than lots of little exposures. My team can handle the workflow on a few exposures in a spreadsheet.”
Bob: “In that case, lets cancel any work on the GrabItAll system. We can solve the other problems with our existing system. We will give you a working version of the first story by the end of next week. We will review again then.”
Frequent Change
The true requirement of the business.
Bob, Debbie and Gary meet to discuss changes to the project.
Debbie: “I need a change to the automated ten days late letter. It currently prints the first and family name. I want to change it to title and then family name. Some of our customers have been getting upset with our “familiarity” on such a sensitive letter.”
Bob: “No problem, I’ll raise a change request.”
Debbie: “How long will that take?”
Bob: “Depends on priority. We currently have 6 months of changes already.”
Debbie: “Why not just make the change?”
Gary: “As you know, that’s what we did when we started. But every change seemed to break something that already worked. The consultant who reviewed the project suggested that we implement the change control process. It means we control the change at a rate that the test team can keep up with.”
Debbie: “Can’t you speed up the test team?”
Bob: “Only if you want a mistake like October to happen again. That’s why we insist on a full month of testing for each new release.”
Debbie: “Let me get this straight. The best way to prevent the system from breaking is to make it hard to change it.”
Bob: “No, we test it properly and make sure we focus on the most important new features using the monthly change control forum which you head up.”
Debbie: “I’ll stick it in at the top at the next change control forum. I cannot face another Monday of answering the phone and explaining why we are not a rude company to someone who sounds like my old maths teacher.”
Frequent Change II
Debbie calls Bob to discuss a problem.
Debbie: “I need a change to the automated ten days late letter. It currently prints the first and family name. I want to change it to title and then family name. Some of our customers have been getting upset with our “familiarity” on such a sensitive letter.”
Bob: “When do you need it by?”
Debbie: “Assuming its only a couple of days work, I would like it as soon as possible.”
Bob: “Can it wait until the next iteration?”
Debbie: “Sooner would better, we are getting a lot of complaints which is not good for the company or my sanity. If I have to listen to my old maths teacher one more time!”
Bob: “We had planned to deliver the next version next week. Do you want it sooner? You will need to check the new changes before we put it live.”
Debbie: “Sooner. Your automated testing stuff is great. We spent ages testing existing functionality at my last company. They called it regression testing. I called it agression testing. Bugs still got through as well.”
Bob: “They still get through, although they tend to be new ones. By the way, thank you for the support to get the budget for the automated test and build hardware. Its cut our build time down from 2 hours to ten minutes.”
Debbie: “No problem. Did you hear about Gary?”
Bob: “What’s he been up to in his new job?”
Debbie: “He got them to cancel the DragOn project. Apparently, even the outstanding costs were twice the real business value.”
Posted by chrismatts at October 8, 2003 5:23 PM