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The Business Value of
Software
The Business Value of
Software
By
Michael D.S. Harris
CRC Press
Boca Raton and London
CRC Press
Taylor & Francis Group
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Preface.................................................................................................................xi
Acknowledgments.............................................................................................xiii
Author................................................................................................................. xv
Acronyms..........................................................................................................xvii
1 Why Software Value?...............................................................................1
Why Not Information Technology Value More Generally?..........................1
Who Should Care about the Business Value of Software?.............................4
What Is the Business Value of Software?.......................................................5
Impact of Perspective on Business Value..................................................6
Software Value Sidestep...........................................................................7
Software Value Life Cycle........................................................................8
What Role Does Time Play in the Business Value of Software?..............10
A More Sophisticated Definition of the Business Value of Software.......10
What Do We Mean by Software Value as an Asset and Software
Value as a Flow?..........................................................................................11
Current Approach to Managing the Business Value of Software as an
Asset...........................................................................................................11
Financial Perspective..............................................................................12
Software Maintenance Perspective.........................................................12
Portfolio Management Perspective.........................................................13
Current Approach to Maximizing the Flow of Software Business Value ....14
What Is Lost When Software Value Is Invisible?.........................................18
2 Six Things the C-Suite Should Know about Software Value.................19
Chief Executive Officer...............................................................................21
The Board...................................................................................................22
Chief Financial Officer...............................................................................23
Chief Marketing Officer.............................................................................25
Chief Digital Officer...................................................................................26
Chief Information Officer...........................................................................28
Lenses.........................................................................................................29
Summary....................................................................................................31
v
vi ◾ Contents
As president and owner of a consulting company that for over 20 years has spe-
cialized in helping our clients measure and improve their software development
processes, I have met many frustrated leaders of software development. Our con-
versations are often about their struggle to explain why software development is
so challenging and how they are delivering value to their often aggravated busi-
ness colleagues who struggle to understand. Struggling is a reasonable place to be,
because it implies dissatisfaction with the status quo. This is fair because the status
quo in the software development industry is to pretty much ignore the business
value of software. This book is for all those “ strugglers” — both information tech-
nology (IT) leaders and business executives alike.
Unfortunately, for every frustrated leader of software development that I meet,
I meet two or three comfortable software development leaders who are satisfied
with their software development and the metrics they use to measure it. What’ s
interesting is that most are not measuring the business value of their software and
don’ t want to measure it. Their reasons for avoiding quantifying software value are
understandable— it’ s too hard, the business won’ t understand it, and (maybe) they
don’ t want to know if it might be bad news. Some of our clients— major interna-
tional companies— have moved or are moving beyond this. Hence, this book is for
these leaders too— time to move out of your comfort zone before somebody pushes
you out of it.
This book is not about business– IT alignment, although it does emphasize the
benefits of business– IT collaboration. To me, alignment too often implies “ agree-
ing to disagree” on the areas in which we are supposed to be working together. If
readers can use even half of the ideas in this book, then I know that the business– IT
alignment will improve as a result of a common understanding of how to improve
the business value delivered by the organization’ s software development initiatives.
xi
Acknowledgments
It is not possible to recognize all those individuals who have ultimately made this
book a reality. The ideas in this book come from articles and books read, webinars
and seminars attended, and many conversations with colleagues and clients. To all
of those unnamed individuals who have influenced the ideas in this book, thank
you.
I am grateful to John Wyzalek at Taylor & Francis Group for having the confi-
dence in me to support this second book.
One particular set of conversations provided the spark that lit the fire that
became this book, and I’ m grateful to Howard Watson and John Nevins of BT for
asking the questions that got me thinking several years ago.
I am very fortunate to work with a great bunch of people at the Premios Group.
These individuals are the collective “ face” of Premios to the world. Their care for our
clients and continuing professionalism have made Premios and continue to keep us
at the forefront of software development measurement and process improvement.
Harrison Zipkin was very helpful with words and thoughts on Chapter 11. I am
especially indebted to Tom Cagley for his willingness and ability to argue with me
about the big picture and the finer points, and, in particular, for his extensive con-
tributions to Chapter 10. My thanks are due to Capers Jones for privately sharing
his lucid explanation of the differences between Waterfall and Agile, which formed
the basis of the Appendix.
I must thank my reviewers who helped me with improving the content and text
of the chapters as I went along: Maria Bassegio, Karen Higgins, and Sarah Weddle.
Any remaining errors are mine alone.
Once again, I must acknowledge my eternal thanks for the love and support of
my wife, Jane. My muse.
xiii
Author
Michael D.S. Harris brings to this book a wide range of IT perspectives, specifi-
cally in the area of delivering business value. His international career has taken him
from production management, through research and development (R&D), project
management, and academia, to consulting, before planting him firmly in charge of
a large software engineering group for a public company. While there, he decided
that he liked one of his vendors, David Consulting Group, so much that he would
buy the company; and last year, he decided it was time to change the name of
the company to reflect his passion. In 2016, the David Consulting Group became
DCG Software Value (now part of the Premios Group, following a merger with the
Spitfire Group). Mike is a chartered engineer (CEng), a member of the Institution
of Engineering and Technology (IET) in the United Kingdom, and a member of
the Institute of Electrical and Electronic Engineers (IEE) in the United States. He
is a Scaled Agile Framework SAFe program consultant and certified Scrum master.
With their much-loved, high-achieving kids all grown up and pursuing their
independent lives, Mike lives with his high school sweetheart, Jane, outside
Philadelphia, in southern Colorado, and on the coast of northern England as time,
work, and whim permit.
xv
Acronyms
xvii
xviii ◾ Acronyms
1
2 ◾ The Business Value of Software
because, in my opinion, software represents the best and biggest way to increase
value from today’ s IT, as hardware becomes more and more commoditized. In
their book, The Real Business of IT , Hunter and Westerman (2009) reported on
a survey of 153 senior executives conducted by the Massachusetts Institute of
Technology’ s (MIT) Center for Information Systems Research (CISR), “of the
eighteen common IT and non-IT tasks, only four – application development;
business process redesign and organizational change; need identification; and
IT oversight – have a statistically significant correlation to the business value
provided by IT.”
This book is a double acknowledgment that we did not focus enough on the
business value of software in the last book and that the thinking about and tools
available for software value have moved on.
Of course, the rest of IT has moved on too since we wrote the last book. The
latest digitization wave (I am old enough to remember several of these) is based
upon the collective challenges presented to IT departments by social media, mobile
smartphones, business analytics (sometimes called “ big data” ), and cloud hosting of
applications and data. Collectively, these driving forces are sometimes referred to
as SMAC . Leaving aside analytics for a moment, the real industry challenge is that
these trends represent significant changes for the IT departments that previously
had direct control (and often ownership) of the computing hardware that staff and
customers are using. Sort of. Some perspectives on this follow:
future of these new interactions. The way that organizations have addressed these
needs has matured over time according to priority. First, transactions needed to be
fulfilled. Second, transactions needed to be economically viable. Finally, analysis
(analytics) of transactions were needed in attempting to predict and optimize the
future. Fortunately, the software and data needed to drive the transactions with the
decentralized hardware were exactly what was needed to enable the analytics to try
to predict future trends. Of course, collecting the data brings its own challenges, as
personal privacy becomes an issue. I will consider the value of the data associated
with the software in Chapter 4.
The impact of the continuing decentralization of hardware will not end with
this current wave of digitization. The SMAC acronym does not take account of
the Internet of things , essentially the decentralization and proliferation of Internet-
capable monitoring and control capabilities to everything that is economically
worth measuring in our environments, from the refrigerator door to the water flow-
ing out of the shower.
While the preceding perspectives illustrate how our perception of IT value
is changing due to hardware decentralization, there is a small counterflow that
is worth noting. While cloud computing enables the distribution of processing
hardware to be closer to the markets where it is needed, some software that had
previously been distributed to personal computers (PCs) is being consolidated into
software-as-a-service (SaaS), products of which the most often quoted example is
the customer relationship management (CRM) service provided by Salesforce.com.
Another more consumer-oriented example is the delivery of video on demand
through Netflix. However, this software consolidation may be the exception that
proves the point because I assert that SaaS implementations tend to make the soft-
ware more pervasive as it usually becomes more accessible (no distribution of disks
and complicated installation) at a lower cost.
My point here is that if the typical organization’ s IT department is about deliv-
ering hardware, software, and the connections between the two, then, while it has
been said before but has never completely come about, I would argue that one side
effect of SMAC is the increasing commoditization of the hardware in the hands of
an organization’ s staff and customers. The response from organizations has been to
manage this loss of control of the hardware through more and different software.
Hence, I argue that the business value of software has increased and has become
relatively more important in the IT sphere than when we wrote our last book. In
arguing this point, I recognize that the distinction between hardware, software,
and systems is becoming smaller every year. I could have used systems throughout
this book in place of software, but I felt that this would be too much of a distrac-
tion. If you prefer to read software as systems throughout the book, please be my
guest.
Regrettably, the measurement of software value in organizations is sporadic
and weak. As we will see in the rest of this book, there is a lot of opportunity to
improve, more than enough to justify the focus of this book on software value.
4 ◾ The Business Value of Software
Reinertsen (2009) has shown that product development, focusing on these pri-
orities, especially in a localized way as is typical, does not maximize the flow of
software value. Instead, the value (or relative value) of software programs and proj-
ects or epics and stories needs to be made explicit from top to bottom of the orga-
nization so that everyone who can influence the flow of software value is explicitly
aware of the impact that their day-to-day, tactical decisions will have on the flow
of software value. This, then, is a better definition of why “ everyone” should care
about the business value of software.
Before I leave this section, I should return to an assertion I made previously but
did not justify. I claimed that, “ the value of the software asset pool must simply
decline over time.” Here, I am not talking about the amortization of the capitalized
cost of the software on the balance sheet— although that is certainly a consider-
ation. Instead, I am asserting that the value of the current software to the business,
the business value, will inevitably decline over time as the business environment
changes. This is based on the assertion that software is most valuable to the busi-
ness when it is fit for purpose . A static piece of software that is not evolving as the
business environment evolves becomes less fit for purpose and therefore has less
business value (see Figure 1.1).
Why Software Value? ◾ 5
Requirements
Business value =
fitness for purpose
Software
development
(maximize flow)
Software
assets
Interestingly, this leads to another conclusion: Not all new software added
to the organization’ s software asset pool necessarily increases business value (see
Figure 1.1). For example, there is no added value if the new software is not used
(e.g., an ATM feature that cardholders never choose) or if the business environ-
ment has changed since the new software was requested and the new software is no
longer relevant (e.g., a new, first-to-market insurance policy for which competitors
have brought out a much better solution since the new software was requested).
Hence, the value of a new piece of software cannot be assumed to be the value it
was assigned when the business case for development was approved. Organizational
process is needed to monitor, analyze, and manage the business value of the orga-
nization’ s software asset pool. I will suggest several such processes in this book.
Organization
In-house Not-for-profit
In-house External
New End-client lens
software
Bu
ild
-b
s
en
uy
tl
len
ofi
s
Pr
For-profit COTS
In this book, I will tend to focus on businesses seeking to make money through
the sales of products and services other than software, even though these products
and services will often use software for some part of their product or service deliv-
ery if only because, “ What is money other than some numbers in some software
somewhere?” In the context of the lenses, this means I will generally have in mind
a for-profit, in-house build set of lenses. That said, I will consider the other lens’
perspectives when the differences are significant.
those conditions changed. The software value sidestep tends to occur when soft-
ware can be developed or acquired so easily or cheaply that it is not worth incurring
the expense of developing and sustaining a value model for the life of the software,
from concept through cash to end of life. Put simply, using a modern consumer as
an example, there is no point doing a business case and calculating total life cost for
the $5 game app that I want to add to my smartphone. Naturally, there is a point in
doing a business case to develop that app in the first place, unless, as is sometimes
the case these days, the app was initially developed for fun or voluntarily to provide
a useful service.
For much of the short history of software, this logic applied to software acquisi-
tion and development for organizations under the following conditions:
The problem with the software value sidestep was, and is, that small simple
changes to a given piece of software increase its size and complexity incremen-
tally to the point where even small changes become harder and more costly. The
software ossifies. Indeed, despite the best efforts of software developers and new
methodologies, most useful software reaches an age where the cost-benefit of small
changes flips negative. It becomes harder and harder to justify the increased cost of
a change based on the incremental business value that it delivers.
In explaining the software value life cycle, we must be careful not to dismiss the
business perspective as a misunderstanding of challenges in continuing to deliver
value from the old software. It may be true that businesses don’ t understand why
small changes cost more and take longer on the old software, but they don’ t (and
shouldn’ t) care. From a business perspective, the new software required by the new
hardware is more valuable to them because it is more flexible. Even if it doesn’ t
have all the (customized) functionality of the old. There are strong echoes here
of The Innovator’ s Dilemma, first described by Clayton M. Christensen in 1997
(Christensen 1997). Briefly, Christensen made the case that new versions of estab-
lished products tend to gravitate over time toward serving the top-end customers
who demand the most functionality from the product. This leaves the established
products exposed to competition from new, cheaper products (possibly but not nec-
essarily based on new technology) that don’ t have the breadth of capabilities of
the established product but meet the limited needs of a significant portion of the
established product’ s customer base. Losing customers in this way undermines the
business proposition of the established product because the payments of the many
are used to fund the needs of the top-tier few. This is exactly how the value of long-
lived software is undermined when small changes become more complex and more
expensive.
As we can see in Figure 1.3, the business value of software over its lifetime is
an S-curve. Our use of this shape of a curve is derived from the classic product
life cycle models. Does this imply that I believe that software is a product like any
10 ◾ The Business Value of Software
other? Yes, in that the ways its users interact with it are subject to the same influ-
ences (e.g., The Innovator’ s Dilemma [Christensen 1997] and Crossing the Chasm
[Moore 2014]) as “ normal” products. And, no, in that software is almost unique in
its human-created complexity and the fact that most of that complexity is invisible
to the user. The S-curve works for our argument because software development
is similar to product development, but software is different from most products.
Software has business value if profits increase as a direct result of the intro-
duction of a new piece of software.
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