ROCE Clusters - categorizing benefits

There seems to be a huge misunderstanding in the Agile Community about what is actually a "benefit". We quickly get into a false dichotomy where people argue that only ledger impact or only innovation should be considered relevant. Let's break with that. There are many types of benefits:

Different ROCE clusters

Before we begin: In no form or fashion would I claim that this is a comprehensive list of clusters, nor that there are no other ways to generate benefits within a cluster than those described: This article is an attempt to defuse the myopic perspective that there is only one way to look at benefits. 

Usually, an initiative aims at a number of ROCE clusters simultaneously. As a Product Manager, you must understand the clusters you're affecting, both directly and indirectly. In such a case, you need to define the target order: what's your primary focus, what consequential effects do you expect?

For each cluster in question, you need some metrics to measure whether you're making progress on your initiative. Financial metrics tend to be the easiest, with capability building metrics being the hardest to figure out.

ROCE Clusters

Every initiative you're pursuing should belong to at least one ROCE cluster. For example, "Reduce server outages for our Online Game from 8 hours a week to 10 minutes a month, to avoid losses caused by offering voucher compensations worth $150,000 a month."

ROCE clustering is very useful in that it can be aggregated quickly to a Portfolio level and gives you a pretty good overview of where you are spending your money: how much do you invest into patching holes, how expensive is your new strategy, and: are you innovating enough? 

If your portfolio contains only a few clusters, you may have a massive strategic problem.

This article describes seven different clusters and some metrics you may pursue within these clusters. You may find different or additional metrics, or you may find some metrics applicable to a different cluster, and you may find that a cluster not listed here is missing for your own organization. 

If you wish to adopt ROCE clustering in your organization, you may need to identify those clusters relevant to your own organization.

Ledger Benefits

Although the most desirable benefits from an accounting perspective, these tend to be the most elusive in practice, as they are often more consequential to other benefits than direct.

The two most common ledger benefits we are looking for are:

• Profits
• Savings

Loss Avoidance

To discriminate this from "savings", let's first define "loss": Loss is an evitable part of your business that only exists because something is messed up.

Common sources of losses are:

• Fines
• Write-Downs
• Cancellations
• Compensations

Capability Building

The problem with Capabilities is that you can't really translate them into money: they translate into future benefits. This makes capability building very risky, because you don't know if it pays off until it does. And that may be years into the future.

Here are some kinds of capabilities you may invest into:

• Strategic Enablement
• Support Infrastructure
• Network Effects

Innovation

Why should we innovate? The modern business-oriented approach is to look at a problem you observe, then solve it. New solutions to known problems are the most common form of innovation, and most companies innovate mostly in a form of local optimization, i.e. solving their own problems. New products often appear on the market when they solve someone else's problem. But there are also other forms of innovation - those which only serve as a foundation for building solutions to problems. This gives us the most common forms of innovation:

• Solving Process Problems
• Solving People Problems
• Solving Market Problems
• Base Innovation

Demand Shaping

It may sound odd, but sometimes, we invest money not to build some product, but to shape demand for an existing product. Demand shaping allows us to optimize the value generation of our products and services - which includes reducing overproduction and overcharging on the one hand, and stress and overburden on the other. It comes in three forms:

• Increasing Demand
• Stabilizing Demand
• Reducing Demand

I would like to go specifically into point 3 - reducing demand. That's an especially good idea on something called "failure demand", i.e. when a service unit (e.g. Complaints, Repairs) faces high demand due to something else not working. It's also an important preventive measure when over-demand would lead to negative business outcomes, such as loss of trust.

Risk Management

Risk Management could include anything that reduces impact and/or probability of anything that affects either us or our customers. Probably the most famous risk management product is insurance, which does nothing other than moving financial risks from our clients onto ourselves. It doesn't reduce probability, only impact.

The most common types of risk we're dealing with are:

• Business Risk
• Operational Risk
• Market Risk

Compliance

The last cluster this article covers is compliance with rules and regulations - in this cluster, we can't win, we can only minimize losses. So, how much should we spend on compliance? As little as possible, and whenever we do, we should try to combine it with at least one other cluster.

Compliance isn't as much about solving problems, as it is about meeting minimum requirements from:

• Laws & Legal
• Market Regulations
• Standards
• Safety & Security

Summary

ROCE Clusters aren't benefits, they help you categorize your benefits in a way that it becomes obvious where your portfolio budget is going and where you're looking for improvement.

You will still need an appropriate benefit hypothesis and actionable metrics to turn this into a relevant business practice. But that's another topic for another article.