This blog is an update to Chapter 5 of the 1FaaT book first published in November 2020. It is designed to help organisations that wish to unite Commercial, Technology and Finance silo’s.
‘What is a chargeback model anyway?’ I was having a beer with Adrian who was working for a pillar bank in London. He was an experienced software engineer who had been making a small but growing difference in automating how software was released, primarily through tooling.
His boss had tasked him with completing a form for Finance to justify a software tools expenditure that would improve engineer productivity. We chatted about the numbers for a while, and on average, a fully loaded engineer was costing the organisation £92,000. The productivity tool would cost about 50 pence per engineer.
‘I know this works. It saved me 2 hours on two occasions in just one week. I will probably use it once a month and will be able to ship more software to customers faster’ Adrian said.
Adrian was a little frustrated as this task was keeping him from actually building working software.
‘As we chatted through the numbers we could see how the tool would improve productivity probably by as much as £2,800 per annum per engineer. But that was not what Finance required.
Adrian explained. ‘ I have a form to complete where we look at the TCO (total cost of ownership) over 5 years and Finance is not interested in the productivity benefits. They need cost aggregated across all engineers and it is in an account code called ‘engineers tools’ for an annual budget which is already spent.
Some weeks later I circled back to Adrian. They had not purchased the tool as the budget was exceeded and Finance was looking to establish which tools could be dropped to fund the new expenditure which is not an unreasonable but cost focussed question.
On reflection Adrian and I concluded that we needed to find a way to help finance understand how much value an engineer can create when a feature was released. We need to Finance to ask this question;
How much additional Customer Value can a more productive software engineer deliver?
Trying to explain the concept of Customer Value to Financial folks is not easy. Their professional training is based on rigorous process and cost controls, a world apart from the concept of placing bets on potential outcomes from experiments. They perceive the calculation of future customer value as voodoo when compared to the validation of historical factual accounting transactions. The majority of Accountants are Certified Public Accountants (CPA) whose training is based on auditing historical accounts i.e. looking back.
CFO’s and Finance teams will use the terminology of margin, cross and upsell etc. Once you hear this language you are on fertile ground to discuss hypothesis driven development. For example one of our clients tracks the ratio of lookers:bookers and will propose experiments to improve that ratio knowing that each additional conversion equates to incremental margin. Thats real money.
From the chat with Adrian at the top of this Chapter we can see the Bank is delaying customer value because a budget number is exceeded. To be clear – there is no correlation between the tools budget and the opportunity cost of a customer with whom we have failed to transact because a feature was delayed. Just lost time to market.
It is clear this older cost management model is not aligned to rapid value realization. The model is not sufficiently agile to attune with any business that wants to dynamically pursue opportunity. The markets know this to be true in their comparative valuations of older and newer business models. For example. Revolut’s market cap exceeded Natwest in June 2021.
One part of the subtitle of the 1FaaT™ book is ‘overcoming cultural debt ’ ..this is a verbose way of saying ‘we get in our own way’. Measuring technology investments as cost is the wrong place to start. In later Chapters customer centricity and urgency are a focus. Asking engineers to take time out to complete forms should be minimised but any such paperwork should drive questions about customer value.
If you are constantly testing the market with new features then you can be sure your direction is constantly resetting and at pace. If we wait to deploy features and let paperwork slow down our engineers we increase the risk that if we are going in the wrong direction we take a long time to reveal this inconvenient truth.
Fail fast, succeed sooner. David Kelley, founder of IDEO.
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