At Being Guided I have been working on how our customers can clearly map out a solid use case, financial justification and technology preferences for high-value products and services across healthcare, manufacturing and technology industries.

Value Engineering is a great way to validate the outcomes from Design Thinking engagements: to place a solid financial business case for what has been generated through the six stages of Stanford d.school Design Thinking¹ we adopt at Being Guided.

Value Engineering was originally conceived by Lawrence D. Miles², a General Electric engineer. Miles' techniques have saved design engineers, manufacturing engineers, purchasing agents and service providers millions of dollars.

To quote Miles, it was neccessary to show "why so much unnecessary costs exists in everything we do and how to identify, clarify, and separate costs which bear no relationship to customers' needs or desires."

Value Engineering eliminates waste and determines value over price. This can apply to calculating the cost of purchasing (or not purchasing) any high-vale product or service in timely manner. It is quantifying time-based value versus the cost and inaction of remaining with business-as-usual.

As Value Engineers, we set the scene mapping your ideal customer's needs with your offering. This is where we apply Design Thinking to enable you to build receptivity, rapport, trust and truth with buyers - early and often.

From a financial perspective, we start with a simple question for the buyer:

What is the cost of NOT buying the your product or service?

Firstly, let's look at the Return On Investment (ROI) Model - a general formula:

ROI = (Cost of Investment / Net Profit​)×100%

To adapt this formula for an As-Is vs. To-Be comparison, consider:

Net Profit: This will be the difference in profits between the Future State (To-Be) and the Current State (As-Is).

Cost of Investment: This is the cost incurred to move from the Current State (As-Is) to the Future State (To-Be).

Given the above considerations, the formula becomes:

ROI = (ProfitTo−Be​ − ProfitAs−Is​​ / Cost of Transition) × 100%

Where:

Profit To-Be = Profit or (benefit) in Future StateProfit As-Is = Profit (or benefit) in Current StateCost of Transition = Cost to move from As-Is to To-Be

Note: If you're measuring benefits other than strict monetary profits, such as time saved or other intangible benefits, ensure you can convert these benefits into a monetary value for this to be valid.

To calculate the Return On Investment (ROI) from AI-Powered Digital Innovation with the specified inputs, we can formulate several equations. Let's define the variables first:

BVAs-Is = Current State (As-Is) Business Value generated per annum without Solution.BVTo-Be = Future State (To-Be) Business Value generated per annum after investing in Solution.

COS = Cost of Solution.ROI = Return on Investment as a ratio relative to the Cost of Solution.

CoD = Cost of Delay per day when not investing in Solution.CoDN = Cost of Doing Nothing per day when not investing in Solution.

CoDday = Cost of Delay per day when not investing in Solution.

CoDNday = Cost of Doing Nothing per day when not investing in Solution.

Calculating ROI from Solution: Net_Gain - BVTo-Be - BVAs-Is

Calculating ROI: ROI - Net_Gain - CDI / CDIThe ROI is expressed as a ratio. Multiply by 100 to get a percentage.

Cost of Delay (CoD): This represents the loss per day by delaying the Solution purchase. Assume the delay starts from the beginning of the year and goes on for d days:CoD = BVTo-Be - BV As-Is (d x CoDday) - CDI / CDI

Cost of Doing Nothing (CoDN): This is the loss per day for not implementing the Solution. Similarly, for d days:CoDN = BVAs-Is - (d x CoDNday) - CDI / CDI

Mutual Value Discovery

The combination of Design Thinking and Value Engineering provide a solid foundation to create what can be described as a Mutual Value Discovery. This simply means that building receptivity, rapport, trust and truth with buyers - underpinned by a co-created, hard-headed ROI Model - results in sellers winning business faster and successfully defending value over price.

References

1. The Hasso Plattner Institute of Design. (2004) Stanford d.school. https://dschool.stanford.edu/about
2. Miles, L.D. (1947). The Lawrence D. Miles Value Engineering Reference Center Collection.
   https://minds.wiscon.edu/handle/1793/301