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Portfolio Management:Balancing Irrefutable Demand with Cost of Delay

Dr Andy Carmichael

Sponsored presentation:

Twitter: @andycarmich@AgileCityLon

#agilecitylonSlides: goo.gl/k399tT

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Physical book available from Amazon and other booksellers. PDF can be downloaded from leankanban.com/guide

Template can be downloaded from goo.gl/Ho5nz8!

Slides: goo.gl/k399tT

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Agenda: Portfolio Management as Value-Flow

Some themes:• Project paradigm versus value-flow paradigm• What are kanban systems?• How kanban systems scale? (Whole Organisation Kanban – WOK?)

• What’s the problem with “irrefutable demand”? • Managing systems for flow rather than utilisation• The primacy of time in investment decision-making:

• Focus on reducing “Lead Time” to reduce risk• Understand “cost of delay” as an economic basis for rational work management

• Portfolio management is investment management• Yield• Duration• Risk• Complexity

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The project paradigm vs value-flow paradigm• Project paradigm is ubiquitous from team to portfolio levels

• Define scope and time horizon (introduce constraints)

• Estimate schedule, budget and risk

• Manage slack to ensure on-time-on scope-on-budget

“In complex domains (e.g. multiple overlapping products in competitive markets), a project-centric model of the world is profoundly unhelpful!”

• Value-flow paradigm• Manage investments to maximise probability of value realisation

• Reduce size and risk of individual changes

• Reduce Lead Times

• Minimise cost of delay

https://en.wikipedia.org/wiki/Cynefin_framework#/media/File:Cynefin_as_of_1st_June_2014.pn

Requests Selected Development Acceptance Complete

Discarded

Commitment

Ongoing Ready

4 6 4

Delivery

System Lead Time

Kanban systems balance accepted demand

with capacity/capability

Re

lea

sed

Receipt

Customer Lead Time

Request

Requests Selected Development Acceptance Complete

Item per

time period

Discarded

Commitment

Ongoing Ready

4 6 4

System Lead Time

Re

lea

sed

Receipt

Customer Lead Time

Accepted

Request Delivery

Regular cadence

Sync’ing System and Customer Lead Time

Time in Dev Time in Route to Live

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The 3 Dimensions of Scaling Kanban

Chains: expand the

scope (before / after)

Portfolio

Product

Service

Personal

Products - GoalsStrategic Direction

Features - ValueProduct Management

Stories - DeliveryDay to day Leadership

Tasks - FocusIndividual Professionalism

WEEKS/DAYS

DAYS/HOURS

MONTHS/WEEKS

YEARS/QUARTERS

Hierarchies: related work

items with different sizes,timescales and levels of decision-making (scale-free Kanban)

Networks: management

of interdependent servicesat the same level

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Good kanban systems support good decision-making at every level

• Personal/team: focus / professionalism / quality• Service: deciding on timely delivery of value• Product: deciding where the value is• Portfolio: deciding the balance of investments

that will fulfill strategy, while hedging known and unknown risks

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What is “irrefutable” demand? Request for services that cannot be denied or refused

“we’ve already committed to do it”

“the boss wants it”

“there’s no one else that knows how to do it”

“it’s a legal requirement”

“the customer needs it”

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Irrefutable demand…

isn’t!

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Demand and capability must balance… eventually

• Ignoring imbalance will turn a “flow” system into a “blocked” system

• Several important concepts in Kanban address the issue:• Deferred Commitment• Limiting WiP• Managing Flow

• Elevating the constraint• Classes of Service – Cost of Delay.

• Feedback loops – Cadences• Resource Management – Staff Liquidity

The goal of a balanced system is to maximise the flow of value

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Manage Flow:Utilisation (WiP), Delivery Rate and Lead Time• Capacity is finite (and lower than you

think!

• Increasing utilisation increases LT (not much at first)

• Increasing utilisation increases DR (at first)

• At a certain point flow is destroyed. DR collapses. LT tends to infinity!

• Near the critical point, flow is fragile. Perturbations have severe, unpredictable and long-lasting effects.

• The critical point depends on variability

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Resource Efficiency or Flow Efficiency

First focus on flow…then efficiency

“What is Lean” – NiklasModig and Par Ahlstrom

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Flow systems can create delays and inefficiencies as they scale

Systems Thinking

Service

Service

• optimise the whole not the parts• plan as a whole, balance demand• make queues visible• flexible resources

Internal (invisible?) queues. Optimise the whole

Commitment at higher level creates “irrefutable demand” at lower level or downstream. Reserve capacity / classes of service

Blockers and dependencies hamper flow. Blocker analysis may reveal service imbalance

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The primacy of time in investment decision-making:

• Focus on reducing “Lead Time” to reduce risk and improve feedback

• Understand “cost of delay” as an economic basis for rational work scheduling

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ValueLead Time

Minimising Lead Time

The new iron triangle?

• Fit for purpose quality (non-negotiable)

• Maximum value (visible only in retrospect)

• Minimum lead time (the immediate imperative)

Quality

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Understanding Cost of Delay as a driver for better Portfolio Management decisions

• Cadence versus deadline

• Effect of artificial deadlines

• Discovering the real deadlines (where Cost of Delay changes abruptly)

From Alexei Zheglov @az1 - https://twitter.com/az1/status/862052219226664961

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18Time “is” Money?

Time (t) influences Value (V)

𝐷𝑒𝑙𝑎𝑦 𝐶𝑜𝑠𝑡 = −𝜕𝑉

𝜕𝑡Δ𝑡

“Cost of Delay” (CoD)

Make visible at Portfolio level (involve the accountants!)

A rate of change in valuee.g. measured in dollars per week

or “Urgency”?

A Cost –e.g. measured in dollars

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Value flow from a new development (Benefit Profile)with no delay, 10-week, and 20-weeks delay

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Delay Cost Profile and Urgency/CoD Profile

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Value isn’t just increased profit…

• Protecting loss of profits• Increased turnover• Protecting brand loyalty• Increased learning• Reduced risk• Cost saving• New market option• Cover competitors’ moves• Staff retention• Process improvement• etc…

How would you put a monetary value on each of these?

Source: David J Anderson http://www.slideshare.net/ScrumTrek/david-anderson-enterprise-service-planning-kanban

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Probabilistic Forecasting

• How urgent is it to start this item?

• Pay attention to the “last responsible moment” for starting a work item (say, 85% probability point)

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Probabilistic decision making.

• The likelihood of event X occurring

• The effect of event X occurring – f(X)

• The number of times you get to make similar decisions

• Optimising at subsystem level is dramatically less effective• Entrepreneurial organisation

• The right level of exposure to risk (survivable risk)

• Avoidance of deadly risk (non-survivable risk)

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Portfolio management is investmentmanagement

• Yield / ROI (% average annual rate of return for initial investment)

• Duration (weighted average of the times until those cash flows are received)

• Risk (the potential of gaining or losing something of value)

• Options• Hedging• Payback functions

• Complexity (wicked problems)• There are no good answers• The path will be created with every step• The art of learning how to play• Emergent practice

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Conclusions

Chains Hie

rarc

hie

s

• Kanban systems mitigate the issue of “irrefutable demand” balancing demand with capability

• Kanban systems can be connected into scaled systems – Chains, Hierarchies, Networks

• Minimising Lead Time – by committing to smaller items in WiP limited systems – is key to limiting risk

• Cost of Delay is a key component of value-based decision making

• Portfolio management is investment management (Yield, Duration, Risk-hedging)

• Handle complexity:• Governing constraints (Good Practice) or• Enabling constraints (Emerging Practice)

Slides: goo.gl/k399tT

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References and BibliographyAnderson, David J. 2010. Kanban: Successful Evolutionary Change for Your Technology Business. United States: Blue Hole Press.

Anderson, David J. 2012. "Thoughts on the value of liquidity as a metric." November 27. http://www.djaa.com/thoughts-value-liquidity-metric

Anderson, David J. 2015. Enterprise services planning scaling the benefits of Kanban. http://2015.agileworld.de/system/files/vortrag/15-06-29%20EnterpriseServicesPlanning_david%20 anderson_0.pdf

Anderson, David J., and Andy Carmichael. 2016. Essential Kanban Condensed. United States: Lean Kanban University. http://leankanban.com/guide

Berger, Jennifer Garvey; Johnston, Keith (2015). Simple Habits for Complex Times. Stanford, CA: Stanford University Press, 237, n. 7.

Brodzinski, P. 2015. Portfolio Kanban Board. [Blog] Software Project Management: Lean, Agile and Kanban. Available at: http://brodzinski.com/2015/04/portfolio-kanban-board.html

Brougham, Greg. 2015. The Cynefin Mini-Book: An Introduction to Complexity and the Cynefin Framework. United States: C4Media for InfoQ.

Maccherone, Larry. 2015. "Probabilistic Decision Making." November 6. http://www.slideshare.net/.../larry-maccherone-probabilistic-decision-making

Matts, Chris. 2013. "Introducing staff liquidity (1 of n)." https://theitriskmanager.wordpress.com/ 2013/11/24/introducing-staff-liquidity-1-of-n/

Matts, C. 2015. Weighted lead time. https://theitriskmanager. wordpress.com/2015/07/22/weighted-lead-time/

Modig, Niklas and Pär Åhlström. 2012. This Is Lean: Resolving the Efficiency Paradox. 1st ed. Stockholm: Rheologica Publishing.

Morris , Ben, Simon Notley, Katharine Boddington, and Tim Reesa. 2001. “External Factors Affecting Motorway Capacity”, 6th International Symposium on Highway Capacity and Quality of Service, pp 69–7. Stockholm, Sweden June 28 – July 1.

Reinertsen, Donald G. 2009. The principles of product development flow: second generation lean product development. Redondo Beach, CA: Celeritas Publishing.

Stoop, Edwin, 2016. A sketch of the Cynefin framework, a decision-making tool used in management consultancy, Sketching Maniacs, https://commons.wikimedia.org/wiki/File:Cynefin_framework_by_Edwin_Stoop.jpg

Slides: goo.gl/k399tT

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Questions and Discussion

Next steps… Twitter: @andycarmich@AgileCityLon

#agilecitylonSlides: goo.gl/k399tT