Published here April 2005.


Musings Index

Value Proposition: Real Value or Muddled Math?

The Promotion

Some time ago we received an interesting sales pitch from a promoter – interesting because of its beguiling offer and implied assumptions. It ran something like this:

Do you know the value proposition of an offered service? In theory, organizations should be seeing their investment in "X" translated into new and improved "Y", which should improve the bottom line through increased productivity, efficiency, market share, etc. To justify the investment one needs to calculate exactly how the bottom line will improve after subtracting the cost of "X". Until you can do this – don't buy.

What I really like about [The Company] is the fact that the value proposition is a pure play. Our basic service is that we will add dollars to each customer's bottom line. We improve their profitability – no translation required. It really is that simple.

In addition we throw in other valuable services. Services that are needed – but are rarely purchased – because they cost so damn much when purchased from other providers.

These other services include:
  • Real time schedule tracking
  • Real time cost tracking
  • Risk mitigation
These services are valuable. If customers buy these services from other providers they pay large amounts of money because:
  • It's very labor intensive to collect this data in any other way
  • It's costly to produce reports in any other way
[The Company] provides these services for free – it's not labor intensive or costly – it's a simple extension of our basic service and our basic service is cost reduction.

One Partner Observed:

Not only are your comments right on target, but also your business model is in line with a relatively new B2B marketing trend of providing a service and/or product and participating in the profits/revenue stream/or cost savings. In essence [The Company] truly is a strategic partner (with a vested interest in helping its customer reduce costs). The beauty of [The Company] is, it provides:
  1. Management and Control (indirectly through software/field inspections/reports)
  2. Systems (IT expansion, that integrate into several disciplines)
  3. Cost Controls, Project Oversight, Risk Reduction, and Compliance (all at no addition expense).

From a sales standpoint, these benefits should be a no-brainer. The challenge will be to convince the market place (builders, developers, banks and construction management firms e.g. particularly those that already use outside project management support) that our product enhances, rather than threatens, their functions and/or services. Thus, we need to evaluate not only the overall project cost savings, but include and/or at least identify the "other" outside and internal management cost savings our methodology provides.

This can be accomplished on a very broad-brush basis, and then this value proposition can be used to justify (and pay for) the use of "other" outside vendors when and where needed. This would avoid the threat of eliminating their services or function (after all, our savings will help the client pay for their services), thus we become aligned, accepted, and viewed as the improved "Y".

[The Company] Provides a Detailed Explanation:

Here's what [The Company] does:
We reduce costs on projects – after a client does all it can to get the price as low as possible using traditional means, we can reduce cost even further. Lets call the overall cost reduction "A".
  • Our fee is a portion of "A" (call it 50%)     "A" x .5 = "B"
  • "A" minus "B" = "C"
  • "C" is the resulting project owner's net savings
We guarantee a net savings.
  • "C" is added to the customer's bottom line as profit.
That's our pure play value proposition.

In addition – we provide other services – our fee
  • "B", pays for these other services
  • So, "B" is not a bottom line expense for the customer.
Suppose the project costs "R" without [The Company]
  • With [The Company] the project will cost "R" minus "A" plus "B" = "S"
The resulting cost "S" (the cost with [The Company])
  • Will always be a net lower cost than "R" (the cost without [The Company]).
That's our pure play value proposition
  • And we "throw in other valuable services."
[The Company] adds to the customer's bottom line in real dollars and the other service translate to an increase in bottom line too.

Max's Mathematical Doubts

We must admit that we have some difficulty with this promotion.

  1. The first paragraph of the promotion is sound enough. However, "to calculate exactly how the bottom line will improve" you have to estimate
    1. How many people will use the new "investment"
    2. The benefit per unit
    3. Over how long a period – and
    4. Discount the cash flow (DCF) to arrive at a net present value (NPV).

    Essential though this information is, right there, a lot of people have a lot of difficulty doing this on a lot of projects and their products. It means having
    • clear understanding of the future of the market or environment
    • reliable crystal ball, and
    • decision on how long to extend the investment return.

    True, that after about 5 years the DCF differential is not material in the calculation, but that's too long for, say, a software product. As an aside, most project managers typically consider that this is not a part of their project responsibility anyway.
  2. Further down The Company says: "The Company provides these services for free", so the idea is that you can't lose. However, even further down The Company also says: "Our fee is a portion of 'A' (call it 50%)". So, which is it, "free" or "a portion of 'A' "? It's like the old cliché that "Quality is free". It isn't. Every effort costs money, though you can certainly spend some money now to save spending more money later.
  3. In the detailed explanation The Company says: "We reduce costs on projects. After a client does all it can to get the price as low as possible using traditional means we can reduce costs even further" and "We guarantee a net savings."

    It would be nice to know what is meant by "traditional means" and how that compares with the (presumably) untraditional means? This could be valuable information for the project management community.
  4. Given that the reduced costs calculation depends on the problematic calculations identified in item 1 above, how can The Company be so sure to "guarantee a net savings"?

    It is our view that the product of every project has an intrinsic cost based on the costs of the materials to be consumed, the plant and equipment to be used, and the effort involved in assembly based on the people skills and methodology selected.

    You can certainly spend more than this in wastage and mismanagement, but if you spend less you will inevitably compromise either the scope of the product or its quality, or both.
  5. Finally, the return on investment resulting from the product of a project depends on how well the product is deployed and supported during its active life. While we have, in the last five years, given some serious consideration to the optimum selection of projects in a project portfolio, i.e. project portfolio management (PPM), we haven't even begun to document how to get the best out of the resulting project assets, i.e. project asset management (PAM).

Home | Issacons | PM Glossary | Papers & Books | Max's Musings
Guest Articles | Contact Info | Search My Site | Site Map | Top of Page