The Art Of Business Value by Mark Schwartz

"Business Value" is a phrase from Agile software development, and it is from this perspective that the book is written. "Value" itself is subjective, and the hardest part is putting oneself in an omniscient third-person god-mode whence one can view the values ascribed by everyone else. That's not to say that running one's own valuation is easy; there are lots of ways to derive value.

As such, this book seems mis-constructed. Instead of iterating over ways to calculate value and showing why each is not good, it would be better to show instances where one could defensibly use that metric. Granted, one can form a roughly correct impression by reading the book, then reviewing the chapters in reverse and conjuring scenarios for each.

One good thing about the book is that it seems a step in the right direction for Agile. Previously, there was no room for Steve Jobs-like valuations, where the end-users do not understand the value derived until the product is actually in their hands (and even then it may take a while).

Curiously, one of the things ROI does not take into consideration is agility itself. Part of the business value that software development can give us is the ability to respond to unknown future needs. We can build things in a way that gives us more options in the future or in a way that gives us validated learning about the environment we are in. In economic terms, we can say that software development efforts can give us “real options”—that is, options to invest more or to not invest in the future, depending on which way the market goes. This agility has true value to the organization, but it will not be accounted for in an ROI calculation. We will come back to this subject later.

We can fix some of the problems with ROI by using more sophisticated measures than incremental profit as the numerator of the equation. For example, we can look at incremental cash flows. We can even discount the cash flows based on timing and risk. But once we start moving in that direction, we start losing the value that ROI was intended to provide: simplicity in analyzing investment choices.

We will have to look elsewhere for the meaning of the elusive term business value that is the very core of our Agile practice.

Suppose I propose an “investment” to you: you give me a $100 and I give you back $105. Are you interested in that investment?

A good answer is, “It depends.” When do I give you back the $105? If I take your $100 and immediately give you back $105, it is certainly a good investment, and you should keep making it as long as I’m willing to offer it. The longer it will take me to give you back the $105, the less good the investment is, because you are without your $100 for a longer time. Let’s say I propose that you give me the $100 now and I will give you the $105 in one year. Are you still interested in the investment?

Once again, a good answer is, “It depends.” It depends largely on what other options you have for “investing” your $100. If you have another friend who says that he will turn your $100 into $110 in a year, then investing with me is a bad idea. If the only alternative you have is to put your money in a savings account that pays interest of 1 percent per year, my proposal sounds much better. So the value of an investment clearly depends on both how long it will take to pay off and what alternatives you have for investing the money.

This might be a bit unintuitive: you might not care how quickly you get your money back as long as you have plenty of other money available for your everyday needs. When we are talking about small amounts of money lent informally, it doesn’t really matter to us if it takes time for the money to be returned, as long as we don’t need it. But we should care if we have a viable alternative for earning interest on that money. A business is responsible to its shareholders and must make sure it earns a good return on any cash it has. For a business, the time value of money is critical.

Now suppose I say that the $105 I’m planning to give you back is not certain. I think I will be able to give you back $105, but the exact amount “de pends on some factors,” and I might not be able to give it back to you at all. Does this make the investment more valuable or less valuable? Less, of course. How much less? It depends on how risky the $105 is. Another way to look at it is that the higher the risk, the higher the return you should want to make up for the risk. If it’s going to be risky, you might want more than $105 to make you comfortable with the investment. So the value of an investment depends on the timing of its payoff, the alternative investments available, and the risk associated with those payoffs.

That’s the four-paragraph MBA.