Value, Cost and Price in Project Management

I remember making a bold statement to my manager a couple years ago, that could have cost me my position in another company: "If the Research and Development Manager and the Marketing Manager always agree, it means that one of the two is not doing his job". I surely did not mean to be in a permanent fight but a business needs more than a single person to rule it because there are many aspects to take into account to be successful.

Visions

Many companies suffer from the silo syndrom: departments don't talk to each other until they have to designate a victim for the failure that just happened. It often comes from the fact that the one managing the information does not take the time to distribute the knowledge. How do we fix that? Let's organize a meeting! Yes, but we already had lots of them and this is where we ended. So, let's be visionaries: we need a different kind of meeting, and talk about Value, Cost and Price!

After finding a timeslot that fits all calendars, we present the agenda of the meeting: Value, Cost and Price. A simple statement like "we need to improve the balance between these 3" will get an immediate, unanimous buy-in. Why didn't we think about it before? Unfortunately, the next question is likely to jeopardize this initial taste of Heaven: "What do you suggest?" If you feel like creating a chaos, just ask "what are Value, Cost and Price in your own words?": the Sales department will want to increase prices when Purchasing will try to lower them, R&D will want to implement this trendy feature that no end-user will want to pay for, Marketing will ask for a change that will double the development cost, etc. Just think of your last meetings in these lines and you will probably find situations where these terms did not have the same definition across the company and ended up in a fight.

Agree on definitions

I often compare a company to a ship in the middle of the Ocean: if the ship sinks, we all die - or at least increase the unemployment statistics. It takes the work of the complete crew to run it and all positions are equally important - note that I don't talk about responsibility: a small decision of the Titanic's Captain caused the death of many. Therefore it is critical to align everyone's vision toward the same target, and this starts with the same definitions.

Focus

Value, Cost and Price are ubiquitous around us and it is very easy to loose focus: we are providers in our day work but also customers on our way back home and it is not simple to switch our minds - you cannot wear 2 caps at work. When we are at work, these 3 words must focus on the global company's needs, not departments' or individuals'. We often feel that we could be better managers than our own and it could be the case, but we often forget that they manage more information than us and therefore have a different bias. This is what leads us to taking decisions that are not necessarily appropriate if we are not at the right level of hierarchy. We must focus on our own contribution to the company's future.

I run the R&D department of a small company and I rarely answer with a bold "NO" to any request or suggestion from my group: all ideas have their own motivations and it sometimes goes in the direction of the projects, and sometimes no. So I bring these ideas down to 2 sets of questions: "Is it urgent? Is it more important than the project you're working on?" and "what is the value-cost-price balance of this?". I am very predictable in this sense, my guys know it and usually prepare their arguments accordingly - they are trained and it is part of their routine by now. I sometimes raise the concept of Technical Debt but will leave it for another post.

There is another aspect that small companies tend to miss, which is the separation between Marketing and R&D: engineers are great candidates to define what can be done and what not, but tend to associate it with what they like: 2 equally complex features will lead to different evaluations depending on the engineer's motivation. The company needs a referee to balance the R&D vision if it does not want to collapse financially.

The theory

Things start to run more smoothly when the definitions are clear.

Value: The first target of a company is to justify its own existence, paying for its own costs and feeding its people. To reach this goal, the company must develop some internal values, like fair compensation plans or motivating working atmosphere, that are meant to retain the main asset: its employees, i.e. the hands without which the company would disappear. Note that I don't mention the products, which are the visible face but not the essence: products do not have value in themselves, until someone calls in to buy them. This is a key argument between Marketing and R&D.

There is a kind of exception to this vision, in the form of not-for-profit companies. However they also have to rent office space, pay their telephone bills and even some employees' salaries - not-for-profit means that the financial balance at the end of the year must be neutral, not that no-one can make a living out of it. The main difference is in the global philosophy and the cash flow.

Cost: This one is usually the easiest to agree on, and covers all the investments that the CEO will have to sign off. It is the reign of Human Resources and Purchasing. Some costs are periodical, some are accidental (in the sense that they don't repeat). Some are necessary (like the office rental), some are commodity (like the coffee machine). Some have a direct impact on the bottom line with positive Return-On-Investment or ROI (like buying the spare parts of a product that will be sold), some have a negative ROI (like the packs of coffee, if we don't consider the extra motivation of the employees). ROI is often a hot debate.

Price: This last one is usually left to Top Management or Marketing, with some flexibility in Sales. It is the corner stone that can ensure viability or cause a collapse since it is the criterion that will control the cash flow: a high price increases margin but reduces market share, while a low price increases market share but reduces margin. The art is to find the sweet spot. The one thing to keep in mind is that the sweet spot is ruled by the market, which is an external entity and is seldom invited to the meetings, so pricing is a bit like gambling: sometimes you win, sometimes you loose. The direct consequence is that the price aspect of the project imposes a roof to projects costs independently of any indirect value, and that must be clearly understood by all stakeholders: if a product is better-looking with a costly feature that does not increase revenues, it actually harms the company.

Execution

When dealing with new projects, the Manager must enforce a clear, strong vision:

Focus on value-added features (those that increase sales or price),

Make sure that the enabling features are there and under control,

Control unnecessary features, since you can generally not avoid them all without frustrating R&D,

Keep a clear view on short-term and long-term costs by applying easy-to-maintain methodologies.

Enabling features are those that do not give a direct return but help implementing the value-added ones. For instance, when you buy a computer, the Operating System you choose has no value in itself, some are even free. However, if you choose the wrong one, you may not be able to run some of your critical applications or may be taken into a support cost spiral that will exceed your initial gain. Many service providers live from this - just look around how many sales persons tell you "sign me a check of $500,000.- and you will save twice as much", although the saving may be in their own terms, not necessarily yours.

These simple rules can help taking technical decisions that will increase chances of success: an easy-to-maintain product is usually less error-prone and will give a better long-term impression to the customer, leading to a longer relationship.

Wrap up

Project Managers and R&D Managers are often faced with technical challenges that make us focus on specific, short-term issues that take most of our time and the decision process tends to fit in priority these goals. It is critical to regularly take some distance from the daily challenges and look at the big picture: the importance and urgency of the problems and suggestions is likely change significantly.