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The Investor's Perspective

A Forest of Viewpoints

What is a new product? Your answer to that simple question depends on what role you play in new product development. Suppose we gathered the members of a new product team and asked them what their new product meant to them. Further, suppose we could get really honest and insightful answers to our question. We'd probably hear comments like these:

Product manager: "it is a set of features that will position us in a market".

Customer: "it will reduce our costs (or help us to differentiate our own product or service)".

Engineer: "it's a very cool new use of technology that will move us ahead of our competitors".

Sales rep: "it's a lead generator that will help me meet my quota".

Executive: "it's a chance to meet our numbers".

Perhaps these examples are a bit glib. The point, though, is that a product development team has to cope with two important facts:

1. Different roles carry very different perspectives including values, root motivations, and vocabulary.
2. To effectively develop and deliver a product, a team must quickly make very good quality decisions despite its diversity of perspectives and vocabulary.

How can a manager create alignment in a team of diverse perspectives? This is an old quandary. And, there are many suggested solutions to it: train team members on interactive skills, clearly define roles, use phase gates to time each role's contribution, motivate the team to work together with metrics and rewards, etc.

All of those techniques are valuable, at least in some situations. But, they don't focus on the essential activity of product development: decision making. A product is a portfolio of decisions, and the best place to start improving product development is the decision-making habits and processes of product teams.

Opinion

Suppose there were a perspective that carefully weighed and optimized the interests of all the stakeholders during decision making. One could then train all team members, or at least project managers, to analyze issues from that unifying perspective. I think there is such a perspective: that of an investor.

The Income Statement as a List of Stakeholders

Investors use financial statements to assess candidate investments, and when they examine the operations of a business, they often refer to the business' income statement. An income statement is a description of revenue, expenses, and profit for a business.

But, investors also think of the income statement as a list of stakeholders and their claims on a business' products and services. Figure 1 below is an outline of an income statement that identifies stakeholders and their claims. The figure extends the usual income statement format so that it begins with the total value delivered to the customer, and subtracts the claim of each group of stakeholders, including the customer, to determine the residual claim left for the investors. Thus I've named it a "total value statement."

Investors Are Uniquely Self-Interested

So, of all the stakeholders represented in an income statement, what is it about investors that encourages them to weigh the interests of all the stakeholders? It is not altruism. While it is possible that some stakeholders are altruistic, it is much more realistic (not to mention wise) to assume that all stakeholders are self-interested. Customers try to maximize their margin, which is the total value they receive minus the price they pay. Suppliers get the best price they can from the company, employees ask for raises, lenders charge the highest rate of interest they can get, the government maximizes its tax revenue, and investors want to maximize their return. So, it isn't altruism that makes investors adopt a broad perspective.

Investors are just as self-interested as the other stakeholders, but they have a problem not shared with the other stakeholders. For investors to receive an adequate return, all of the other stakeholders must receive a fair claim on the total value. Without fairness, the business will fail: customers will move on, suppliers will find other customers, employees will leave, and lenders will foreclose. Thus, unique to all stakeholders, investors are interested in optimizing the claims for all stakeholders.

This interest in fairness on the part of investors extends even to their own return. Investors want to maximize their return over the lifetime of the company, i.e. as long as their capital is invested. Investors, unique to all stakeholders, are interested in sustainable performance. Thus they tend to consider the long-term effects of their decisions more than other stakeholders, who can more easily withdraw from the business.

Do all investors embody this perspective? No. Some investors do foolish things that result in business failure or under-performance. But that's not the point (and foolish investors are usually not investors for very long). The point is that by using the perspective of a successful, long-term investor in its decision making, a project team will tend to optimize its decisions.

The Holy Grail of Product Development

But what about customer satisfaction? Isn't that the business holy grail? Or employee satisfaction? Won't everything work out if you just focus on customer or employee satisfaction?

No. A business can go bankrupt while keeping its customers or employees satisfied. Creating a successful product just isn't as easy as focusing on the interests of one stakeholder. Market requirements must drive the business-they set the stage for decision making. However, deciding which requirements to meet and how to meet them requires weighing the interests of all stakeholders. Without that optimization, a business is very likely to succeed at meeting market requirements but distribute too much value to the stakeholders and fail to make a profit for the investors.

The holy grail is satisfied investors.

Practice

How can a project team employ an abstraction like the investor's perspective? By taking two actions:

1. Use benefit, cost, and risk to analyze all business decisions.
2. Treat all decisions as business decisions.

There's an example of decision making using the investing model below, but before that the second action calls for some explanation.

Abandon Business-Technical Dualism: Every Decision is a Business Decision

The software engineering literature is full of references to "business" and "technical" decisions and "business people" and "technical people". For example, consider these statements: "programmers don't know anything that business people think is interesting", and "one key to our strategy is to keep technical people focused on technical problems and business people focused on business problems. The project must be driven by business decisions, but the business decisions must be informed by technical decisions about cost and risk". These quotes are from an excellent book on team-oriented development, "Extreme Programming Explained"[1].

The distinction between "business" and "technical" is nonsense. When you're working in a business, every decision you make is a business decision. When a team collaborates on a decision, each member naturally contributes to the decision using his or her expertise. Some people contribute more regarding markets and finance; others contribute more regarding costs and technology.

Implying that some people and their expertise are not business-related is clearly foolish. Consider the total value statement above. Can you really label some elements as "business" and others as "technical"? Of course not. And any "business" person who is not interested in what programmers know is ignoring a core value creator and expense in the business and is not likely to succeed.

In addition, all team members should be encouraged to contribute ideas outside of the mold that is implied by their job title and role. Many "business" people have great insight into the value of technology, and many "technical" people have great insight into markets and applications.

Every decision is a business decision, and product team members should contribute during decision making to the best of their ability regarding any element of the business, from total value to the details of implementation and the resulting stakeholder claims. Team members' contributions should not be constrained due to their job title, background, or role on the team.

Use Benefit, Cost, and Risk to Weigh Decisions

With that bit of preaching out of the way, here is an example of using the investor's perspective in decision making. A common type of decision is one where a team member reports a need to add a feature to a product. On many teams, the interaction goes like this:

Marketing person: "we just have to add X because our competitors now have it".

Engineer: "we won't add X because it's not in the spec".

Discussions like this often deteriorate into a religious argument, fueled by rigid roles and process, and result in a decision based on process or power. Using an investor's perspective, the discussion might go like this:

Marketing person: "our competitors just announced X. We should evaluate adding X to our project."

Team: "OK, what are the benefits, costs, and risks related to each stakeholder in our project if we add X to our product?"

By using the total value format in its discussion, the team can focus its debate on the estimates of benefit, cost, and risk for particular stakeholders. Benefit, cost, and risk are the three elements of any business decision, and therefore any decision made by a product team. The meaning of those terms and the results of the team's discussion are in table 1 below.

The estimates above lead to a simplified return on investment of around ($140,000-$54,000)/$215,000 or 40% with moderate-to-high risk. There's some upside potential due to the improvement in customer stake. This is a risky but probably wise investment, although to complete your analysis you'd need to estimate the economic profit of the investment.

While this is a simple example just for illustration, it does point out some of the advantages of using the investor's perspective to guide decision making. First, to assess the investment value of the proposed change, the team reduced its estimates to dollar amounts wherever possible. A key metric in its analysis, for example, is the cost of delay, and I'll provide more on that in a separate article. Using dollars as a metric gives all the stakeholders a common language.

Second, the assessment of this change might have been different earlier in the project, and would undoubtedly be different later in the project. As a project proceeds, benefits may not change much, but costs and risks certainly do as the cost of rework increases. An investor will always take into account the latest information on benefit, cost, and risk in making a decision. By using the investor's perspective independent of past decisions, the team makes its decision based on the most recently available information and ignores sunk costs. Such an approach is far more practical than relying on preordained standards or processes.

Clearly the idea of analyzing a decision this way is not new. Many people call the kind of analysis in Table 1 a "cost-benefit analysis" (one might ask what happened to "risk" in that name). What is new is the idea of using the total value statement as an outline for group decisions. In particular, without the outline it is easy to overlook the impact on the customer's stake and the cost of change to non-R&D stakeholders.

Even in situations where a team cannot easily quantify benefit, cost, and risk the investor's perspective is useful. I've seen many, many discussions that were mired in religious positioning easily resolved by simply asking team members to rate benefit, cost, and risk on a scale of low, medium, and high.

Finally, asking a team to use the total value statement together to analyze a decision gives everyone on the team a broader perspective and encourages a more thorough analysis.

Philosophy

As a check on the above ideas, it's worth asking if they lead to appropriate behavior from not just a business point of view, but from the point of view of the community and economy in general.

I think that they do because:

1. Ultimately, taking an investor's perspective leads to creating the greatest possible value over the lifetime of a product or company. It does the best job of balancing the needs of all the stakeholders.
2. In maximizing value, one does justice to the capital invested in a company. That capital represents the labor of many people (the investors are merely its custodians). Taking the investor's perspective, i.e. trying to produce the greatest possible value from the invested capital, does justice to those who labored to create the capital. To not maximize the return on investment would devalue that labor.

Summary

1. In a business, all decisions are business decisions.
2. Taking an investor's perspective in those decisions leads to optimum decisions.
3. The total value statement is a useful tool for structuring decision making, even for decisions that are difficult to quantify.

    

Adopting the investor's perspective is the foundation for being an intelligent product developer.

References

1. K. Beck, Extreme Programming Explained, Addison Wesley, Reading, 2000.

Copyright 2002, Peter Bradshaw. All rights reserved.

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