What business value is made of

When we hear people talking about business value it often sounds rather vague. Business value, customer value, stakeholder value, the list goes on and on. And then we watch people trying to make actual decisions based of that, and it all looks baffling. If that process doesn’t make any sense, I hope you’ll find this article of, well, value.

Value vs. cost

Most often, people who are confused by the idea of value when they mistake it for the idea of cost. Engineers and managers are often guilty of that because they instinctively strive for objectively measurable concepts like megabytes in a computer memory or dollar numbers in a budget sheet.

In very layman terms, a value is how much one cares about something, and cost is how much one is paying for something. While cost is a number that we can measure, value does not really measure something, value describes our priorities.

We couldn’t find a better example that we all can relate to than a SCRUM backlog. The order of the items in the backlog describes the value of each item; the more valuable ones are on the top. And, the estimation numbers roughly describe the cost of processing each item.

Yes, I know, points not time, and all that. But, the irony is that it’s exactly the main problem why people struggle to implement SCRUM. Because engineers don’t see the point of committing to estimations amidst uncertainty, and project managers see dollar signs in those numbers; however engineers reframe them. And so, one side looks at the value and the other looks at the cost. No wonder they disagree a lot.

Value is always implicit, and cost is always explicit. Although they’re two different things, they are innately linked to each other through the process of valuation. A bit more on this later.

So, what is value

Now, when it comes to what software companies do, there is a fair few types of value. As I said, a value is a measure of how much one cares about something, and different people care about different things. Moreover, what they care about changes with every day of the week, weather patterns, and the moon phases.

Generally speaking though, there are the following types of values that people tend to talk about within the software development context.

• User value - things that all users of a product care about; as in, anyone who has access to the product
• Customer value - often times, not all users of a product are the actual customers. And by customers here we mean explicitly the users that pay for the product
• Stakeholder value - People who have special interest in certain features of a product are called stakeholders; those may or may not be actual users. Product managers, UX designers, reliability engineers, compliance officers, even sales, all of those groups of people may care about certain features of a product.
• Shareholder value - shareholders are the investors and all sorts of people who, well, hold the company shares and/or options. Those people not necessarily care about any of the product features, they mostly care about the price of shares they hold. More precisely that the prices keep growing.
• Employee value - it describes how much the company employees value working at the company over other employment options they might have. Company culture, career growth, remuneration packages, perks, etc. Those all parts of what’s known as the employee value proposition.

There are probably a few that I’m missing here, and I’m also not including here terms such unique value proposition and such. But, generally speaking those are the types of value that I want you to keep in mind as we go into the next chapter.

What’s business value

The reason why conversations about business value are murky, and why I needed that lengthy preamble, is because there is not a whole lot of agreement on the meaning of the term business value. But, for the purpose of this article we could define it as following:

Business value is, well, what business values. It is essentially a combination of other types of values that defines the business. Let me give you some examples.

A product company is a type of company that defines it’s business value primarily through the process of maximising the customer value. Other types of value are definitely present, but the company is primarily focused on customers. This is the type of company most companies in SaaS strive to be, but sadly that’s not always the case in the reality.

A stakeholder driven company those are often technology companies, or passion projects driven by SME individuals. Many seemingly product companies, are in fact stakeholder driven through visionary leadership rather than interactions with the customer. What defines them is that the stakeholder value is made a priority over everything else.

Growth companies have one very important aspect in common too. They’re trying to attract investment to survive the growth. Depending on how the founders played the investment game in the early days, a company can be pressed very hard to maximise the shareholder value in this phase.

Companies often have a choice in how to define their business value. And that is where having very purposefully defined company values is important. Because that combination of values will define the company for a very long time.

Value and valuation

As I have mentioned before, value and cost, or “price” to be more precise, are linked through the process of valuation. Price is defined by market based on the value and the market conditions.

Price is not defined on value alone though, it is a subject to supply and demand, but also all sorts of other, often poorly understood, criteria. For example your old laptop might have a lot of sentimental value to you, but there are thousands of used laptops available on the market, so they are priced quite low.

That’s a very crude and usually misleading explanation though when it comes to companies and their market valuation. SaaS companies, due to their anticompetitive strategies nature, are usually unique, and their future is rather unpredictable.

Long story short, very roughly we can say that a company valuation is a reflection of the expected future cash flow. It’s obviously not that simple, but for the purpose of this article we could say that a pre-public company valuation depends on how much money they are expected to make in the future.

And now we can tie it all together in a simple definition. Generally speaking, to the market, business value is in creating that cash flow and ultimately profits. But, business value might not necessarily be defined through market valuation alone. A business might define its value through making social impact, or making their employee lives happier, or pushing the limits of technology further, or a myriad of other things.

Ultimately, a business value is what the business values; where its priorities are, and that’s the only thing that matters. Most companies focus on maximising their market valuation, but that’s not the only way to create value.

Final remarks

The concept of business value will probably continue to be a murky subject for a while. But, I hope this article gives you a glimpse into what it’s made of and what the process of value creation might look like and what does it mean in a day to day work.

To translate that into every day language, user features are not the only type of value that matters. Reliability is a value. Good UX is a value. Security is a value. The quality of life of the employees is a value. How a company combines and prioritises those is what essentially defines them as a company.