In my previous article I started describing the various PILS formula components, by describing PBV (Perceived Business Value).
In this article I will describe the other PILS formula component that represents the Revenues side of the formula: The Business Value of a CTB Project (BVCP).
In order to understand BVCP one needs to understand what is a CTB project.
In my book on <ALT+F> I divide projects into two categories when it comes to BVCP:
- Change The Business (CTB)
- Maintain The Business (MTB)
CTB projects are new IT projects that the business see as revenue generators and/or games changes. Examples might be a new trading system, a new game, a new social network platform, etc. By new I mean that CTB projects either haven't yet been deployed to production or they have been recently rolled out to production but are still under the warranty period.
MTB projects are all other projects types. Amongst them we find projects related to all IT systems that have been live for a period long enough to pass their warranty period (legacy systems), evergreening projects and production bug fixes. MTB components will be the subject of subsequent articles.
BVCP is part of the Revenues side of the PILS formula. The business has a revenue generating or game changing idea and therefore estimates a business value associated with the delivery of such idea into production. IT has to implement this idea and in doing so it sustains costs (typically development and infrastructure). Similarly to what I described in my article on PBV, there is a guessing dimension in defining BVCP. Since we've said that CTB projects are not officially live yet, the business value they deliver can only be estimated. However, because of their nature, this should be a positive value (i.e. generate revenue), otherwise why bother to work on it in the first place?
CTB projects are the riskiest kind, as although the business value they'll contribute to an oganisation once deployed into production has only been guessed, the costs sustained to deliver them are real.
There is something else: once a project passes its warranty period in production, it becomes a legacy system, therefore the revenue it generates becomes part of PBV, whereas the costs for its maintainance (be production bug fixes, small enhancements or evergreening) move to the MTB section of the PILS formula.
In general terms, BVCP could be expressed as:
BVCP = Estimated Business Value - Development Costs - Infrastructure Costs
In subsequent articles I'll describe development costs (DECOPD) and infrastructure costs (KTLO) but for now we should take a brief detour on infrastructure costs (Keeps The Lights On - KTLO).
In the PILS formula, we consider KTLO costs as part of the MTB costs, so why are they also considered in calculating BVCP?
The answer is that we can look at out IT systems profitability from two points of view:
- Management accounts. This is a view on numbers that makes sense for directors
- Statutory accounts. This is the view on numbers given to the public and auditing companies
Similarly, we can look at BVCP from a Management accounts or Statutory Accounts perspective, depending on our goal.
From a Management accounts point of view, we want to keep KTLO costs into consideration, as these generally represent a high percentage of the costs sustained in delivering a CTB project into production. From a Statutory accounts point of view, we shouldn't deduct KTLO costs from BVCP as all infrastructure costs are calculated as part of the MTB costs.
BVCP therefore represents the revenue an IT system will generate for the period it has been in production under its warranty period. After such period, the generated revenue will be calculated as part of PBV.
Despite its uncertain nature due to the uncertainty concerning the real revenue that a CTB project will generate once deployed into production, BVCP is fundamental in driving an IT organisation strategy. For example, no PBV could be generated if no CTB project had been implemented in the first place.
Think of an IT organisation and ask yourself why developers are there. Is it just to maintain legacy systems ? Obviously not. In any IT organisation with some budget, developers are mainly tasked with the delivery of new business ideas through new IT systems. Once deployed to production, these systems will first go through a warranty period (the duration of which depends from organisation to organisation) and then they'll transform into legacy systems.
So, if BVCP is so important for an organisation, how do we go about optimising it? The answer appears somewhat obvious:
- Increase the estimated business value delivered by the CTB project.
- Reduce development costs (DECOPD)
- Reduce infrastructure costs (KTLO)
The first option is also the most difficult, because it concerns the realm of ideas. We know that ideas can't be manufactured like in a production line; in the end this is why there are so few people having great ideas and they are paid so handsomly.
Something, however, can be done in the other two areas: development and infrastructure costs and this will be the topic of subsequent articles. Stay tuned!