A key component of the value model is the list of benefits attached to the intended project or initiative. In general, the benefit statements are very easy to articulate but the “value” of the value model lies in how we plan to measure and track these benefits.

In a typical model, every benefit statement needs to have one or more key-value measurements that enable us to quantify it. Many folks often ask me about the difference between a key-value measurement (KVM) and a key performance indicator (KPI). Key-value measurement is a quantification (eventually leading to monetization) of a key performance indicator. For example, let’s say increasing the profit margin by 1% was one of the company’s business objectives. So the profit margin is a key performance indicator that is tracked. When the margin goes up, the business objectives are closer to being met and vice versa. However, a key-value measurement is an actual quantification as a result of that uptick in the KPI. Keeping it simple, if the profit margin goes up by 1% on annual revenues of $100 million, then the KVM is $1 million. I hope that clarifies the difference between KPI and KVM.

While it is true that we would like to have all hard (and easy to recognize) benefits, the reality is that there are quite a few benefits that are considered soft. The general of thumb was that if it was difficult to quantify, it was considered soft. Industrial processes are easier to quantify due to the amount of instrumentation built into them over centuries. On the other hand, human processes, especially those related to desk jobs were always hard to quantify. How do you define the productivity of a desk worker? Is it the amount of time spent staring at the screen? Is it the number of emails sent? Is it the number of meetings attended? So you see that it is very subjective. All that is changing, however. Newer office productivity suites are building in metrics to measure the efficacy of a person’s time at work.

Regardless of advances in office productivity, there are other areas where the measurement of benefits is subjective. Therefore, I find it best to separate the two in my value models. I calculate my IRR/NPV both based on hard and soft benefits so that the decision-maker can use it as appropriate. Just the inclusion of soft benefits in a value model will spur the decision-makers to include instrumentation for future measurements.

In the next blog post, I will talk about how these hard (or soft benefits) can be quantified through key-value measurements.