Portfolio management: Balancing Irrefutable Demand with Cost of Delay #agilecitylon

©2016-2017ANDYCARMICHAELALLRIGHTSRESERVEDAGILEINTHECITY2017
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Portfolio Management:
Balancing Irrefutable Demand with Cost of Delay
Dr Andy Carmichael
Sponsored presentation:
Twitter:
@andycarmich
@AgileCityLon
#agilecitylon
Slides: 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!

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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/Fil
e: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
Released
Receipt
Customer Lead Time
Request

Requests Selected Development Acceptance Complete
Item per
time period
Discarded
Commitment
Ongoing Ready
4 6 4
System Lead Time
Released
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 - Goals
Strategic Direction
Features - Value
Product Management
Stories - Delivery
Day to day Leadership
Tasks - Focus
Individual 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 services
at 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” – Niklas
Modig 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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Time “is” Money?
Time (t) influences Value (V)
𝐷𝑒𝑙𝑎𝑦 𝐶𝑜𝑠𝑡 = −
𝜕𝑉
𝜕𝑡
Δ𝑡
“Cost of Delay” (CoD)
Make visible at
Portfolio level
(involve the accountants!)
A rate of change
in value
e.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 investment
management
• 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
Hierarchies
• 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)

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References and Bibliography
Anderson, 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

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Questions and
Discussion
Next steps… Twitter:
@andycarmich
@AgileCityLon
#agilecitylon

Portfolio management: Balancing Irrefutable Demand with Cost of Delay #agilecitylon

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