So far in our sanitized design thinking value modeling exercises, we have gone through vision alignment, benefits categorization, risks/costs identification. In this blog post, I will discuss the identification of KPIs, both benefit and cost related.

Most organizations do not instrument their processes very well. It is easy to get the KPIs in the manufacturing plant setting but most office process flows are difficult to quantify only because no thought is given to measure them in the first place. If KPIs are hard to obtain, organizations should not be afraid of using proxy measurements. In the example below, # of employee referrals is a good indication of employee satisfaction. If they were not happy at their place of work, why would they refer family and friends?

The identification of the KPIs will give us an indication on how to quantify the value (and/or cost) associated with those KPIs. Take for example, under the operations optimization benefit category, one of the KPIs identified was the % increase in the number of widgets produced per shift. This is indeed a good benefit but what is the value of a reduced rate of increased number of widgets to Valuso? This can be calculated through the following key value measurement:

Value of Increased productivity = (price per widget – cost per widget) * (1 – corporate tax rate) * number of widgets usually produced per shift * # of shifts per year * % increase in production

Assume that the price per widget was $10 and the cost to make it was $6 and the tax rate of Valuso was 16%. Also assume that they produce 1000 widgets per shift for a total of 600 shifts per year (3 shifts for 200 days). As a result of Nova, the expected increase in production is 10%.  Plugging all of that into the equation gives us the following value of increased productivity due to Nova:

(10- 6) * (1- .16) * 1000 * 600 * .10 = $201600 per year

The next thing to consider is that if the benefit is recurring or one-time. The key to a credible value model is to ensure that the KPIs identified are able to be plugged into the right key value measurements. Finally, the KPIs need to be S.M.A.R.T.

Compared to the exercise of using KPIs to develop quantified key value measurements, the quantification of key cost measurements is relatively straightforward to the most part. Most organizations generally know the direct costs of their initiatives. Where they are lax is in the identification of people and process costs. They usually gloss over these costs as they are sunk investments. This gives the sponsor a false measurement of the project viability.

In my next blog post, I will tie up the entire design thinking exercise output into a value model. I will be using a free tool called Valufy that does this with relative ease.