How to measure and estimate Business Value

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How to measure and estimate Business Value

How to measure and estimate Business Value
Vikram Asokan
10 min
27 Apr. 2022

“How do we estimate and measure our business value?” 

Often, we hear a version of this phrase uttered in meetings in every organisation, big and small. Everyone in the company will have some inkling about it but almost certainly every person you ask to explain what they mean by business value will give you a different answer.  

Yet, business value is one of the most misinterpreted or misunderstood phrases. Everyone talks about it but what it means may differ from organisation to organisation and industry to industry. Even between departments it can mean different things.  

So, what does business value really mean? And is there a one-size-fits-all approach to identifying and achieving business value? 

Before we take a closer look at that, let’s first ask ourselves the question, ‘what is value?” 

As per Merriam-Webster dictionary val·​ue | \ ˈval-(ˌ)yü  \ 

Definition of value 

1: the monetary worth of something: MARKET PRICE 

2: a fair return or equivalent in goods, services, or money for something exchanged 

3: relative worth, utility, or importance  

4: something (such as a principle or quality) intrinsically valuable or desirable 

According to prominent Product Leader and author, Robbin Schuurman, “Value comes in many forms, is context-dependent, and may change over time. In the constantly changing nature of the world the idea of value is always different.” 

In business context, we know that the product, brand, market, buyer, customer & competition is constantly changing and evolving. Hence, it tracks that the meaning of Business Value will also change to mirror new trends. Business Value can vary over time, but at its core, it is composed of qualitative, quantitative, rationale and emotional factors which all stakeholders experience and define as value.  

Earlier we mentioned that the interpretation of Business Value can differ between people and even departments. Now, based on the scrum guide and the Agile Manifesto’s 1st principle where it’s stated that “Our highest priority is to satisfy the customer through early and continuous delivery of valuable software”, we can conclude that Business Value as an output of all work done is related to delivering customer satisfaction.   

As per, Business Value results from the intersection of three dimensions below: 

Business value can be broadly classified into five types:  

  1. Commercial / Monetary Value: The value that translates as Revenue, Sales, Profit, ROI etc. 
  2. Customer value: The value that will help the customer continue and increase the use of the product/ service 
  3. Market value: the value that increases the potential number of customers using the product / service 
  4. Efficiency value: The value that increases organizational efficiency and thereby decreases operating costs of the organisation 
  5. Future Value: The value that increases the chances of achieving any of the above values in the (near) future by investing now in Innovation, Learning and capability building (Improvement of People, Process, Productivity and Technology) 

The above answers some of the few relating to product. In addition, customer & market fit can help us to formulate and arrive at our business value. 

Business Value validation

Once we have come up with what our Business Value is, it can be validated to ensure the below conditions:

Business Value Estimation

Business value estimation is done using common methods which range from fastest to the most qualitative suggested by scrum Inc

Bubble Sort

  1. Have the feature list arranged in the Top to bottom order
  2. Starting from the top feature item of the list
  3. Compare value of each next feature item down below
  4. The lower value feature items are moved down in the list
  5. Repeat until all feature items have been compared

Planning Poker

  1. Choose and use Fibonacci series or numbers 1-10 as points for relative estimation
  2. Pick and assign it points e.g., 0, 1, 2 for a low value feature item
  3. Pick and assign it points e.g., 3, 4, 5 for medium value feature items
  4. Pick and assign points e.g. ,6 ,7 ,8 to large value feature items
  5. Pick and assign points e.g., 9, 10 to very large value feature item
  6. Use estimation cards to independently estimate each feature item
  7. Share estimates when there is consensus
  8. If consensus is not achieved, discuss the highs and lows of the feature item
  9. Repeat the estimation process until team gets consensus

Break Even Analysis

It’s the comparison of cost of creation and expected revenue to cover the cost of the feature

How many units needs to be sold to cover the cost of creating the feature

Return on Investment (ROI)

It’s the amount of money gained or lost relative to the cost of creation of feature

= [Total revenue from the feature - total cost to develop feature]/total cost of developing feature] X 100 

ROI is expressed as a percent

Cash Flow Analysis

What are the revenues generated and expenses accrued for a feature in each month?

What is the net effect on cash flow of the feature over a period?

Net Present Value (NPV)

It is the difference of the present value of cash inflow over the present value of the outflow of the feature taking into consideration the time value of money

Cost of delay (COD)

It’s the calculation of how much you lose due to delaying

  1. Cost of Delay is calculated using the formula COD= [ Expected profit in the time period X Project Duration in time period]
  2. If the project duration in 2 weeks and we make a profit of $2,000 in 2 weeks, then cost of delay is 2000 x 2= $4,000. CD3 is the cost of Delay divided by duration then divided by 1,000. If cost of delay is $4,000 and it is delayed for eight weeks, then [4000/8]/1000 =0.5 CD3=0.5

Business Value Measurement

Even with its constantly evolving and changing nature the question to whether Business Value can be measured is yes. You measure it using the following methods:

  1. Cost of development and maintenance of product features
  2. Product Revenue: To measure all product revenues such as new revenue, Incremental revenue, Retained revenue (in terms of dollars over a period)
  3. Cash Flow: The revenues generated, and expenses accrued for the feature
  4. Return on Investment: To measure the amount of return on a particular investment, relative to the investment's cost
  5. Net Present Value: The difference between the present value of cash inflows and the present value of cash outflows over a period
  6. Customer related KPI's: These include Customer satisfaction, Net promoter score (NPS), Number of leads generated, new customers (customer conversion ratio), Customer retention ratio, Customer usage index, System response time etc.
  7. Timelines: These include the number of planned Sprints in a Release, the total amount of planned work in a release, the planned budget for a release, actual spend etc.
  8. Business change indicators: Such as Team morale, user adoption, and stakeholder engagement.
  9. Significance of new learnings and knowledge gained by developing and maintaining the features
  10. Amount of risk removed by developing and maintaining the features such as Schedule risk, Cost risk, Functionality risk etc.

Increase in the Revenue generated, Profitability, Market share, Brand recognition, Customer loyalty, Customer retention, Customer satisfaction can also be used to measure Business value.

From the below Scenario example, we will explain how business value can be measured in practice.

In an organisation of 200 employees a lot of time is being spent on manual account opening application entry. It takes one hour for an employee to manually log an application and activate it normally. Every day each employee spends four to five hours on logging.

Problem: Employees spend a lot of time manually logging the account opening form at one hour per form

Value: Saving an employee’s time by automating the manual account opening application entry

Target value: 15 min per form

Time frame: 2 months

Solution: an automated system for data capture and log account opening application

Measurement method: Application log & activation time

Cost: hours of work/wages to pay

Identifying the Business Value and enabling the team to achieve it and enhancing it using a right strategy to maximise the value is a unique and especially important process for an organisation.

Much like an agile adoption or transformation strategy, a one-size-fits-all approach does not work well with different organisations. You can and should adopt your approach for achieving and measuring the business value specific to your organisation’s needs.

Once you start aligning to your organisation’s business value and measuring your progress, you will see a significant improvement not only in productivity, quality, and customer satisfaction, but more importantly will see improvement in the happiness index of your employees. This will help the organisation to evolve, accelerate and advance with happy, engaged employees.

If you have issues in evaluating and measuring your business value, we can help. Reach out to us to learn how we might help you!

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