New Pet Idea

While listening to a recent podcast from the Cato institute on the value of globalization, I was introduced to something called the Stan Shih Smile Curve of Value.

The idea is that the lowest value item in the production chain is the manufacturing of the product. This is why, for example, that the while every iPod and iPhone are considered to be manufacturing imports we should not care. The real value of the product is in the development and end-use. It is estimated that of the $400 price of an iPhone a mere $5 goes to manufacturing in China, about $45 goes to Japan for parts, the other $350 to the US or, in this case, Apple. This is why every iPod and iPhone say, “Designed by Apple in California. Assembled in China.”

Anyway, this got me to thinking about what this curve would look like for software implementation firms. Here is what I came up with:

image

What this shows is that the value to the customer is actually delivered at the extremes of the relationship.

What are your thoughts? I am just beginning to play with this model, so it is very open to criticism. I am especially interested in hope accountants, lawyers, advertising agencies, et al would view this model.

Comments

  1. And if you’re a consultant who bills for their time you will see this curve inversely because the majority of the time is traditionally spent on the implementation part.

    The smile curve is another great way to debunk the labor theory of value.

  2. I practice law in Austin, Texas. I like the model but my initial reaction is that the model attributes maximum value at the end of the production chain. This is one of the major criticisms of the billable hour; that is, there is no incentive to shorten the production chain which in most cases increases value to the client. In most complex litigation cases there is enormous work (and value) in the planning process. We will see the legal industry start recognizing the value of project management and implement PM. PM is much different than case management. I think that implementation of the plan through project management will also have enormous value to customers.

  3. @Bradley, thanks for your comment. I appreciate your insight into the legal profession on this. I would think that what have been traditionally known as retainers would be replaced by an on-going Service Level Agreement. This would be the upside of the value on the right side of the model for you.

  4. Steve Benway says:

    Ed, I think this would make a great addendum to, or even replacement for, the Emotional Project Lifecycle bisecting curve (workload vs. confidence level).

    It frames the relationship/partnership between customer and consultant in a more positive light than the Lifecycle curve, and as one of the main purposes of the hand-off meeting (which is where we currently present the Lifecycle curve) is to instill confidence in the customer that they have, indeed, chosen the right people for the job, a “smile” certainly captures that better than a bisecting curve.

    I’m not completely sold on using “implementation” on this curve, although I’m not sure what I would use in its place.

    Also, if this were to be something we presented as part of a presentation to a customer, I’d be tempted to drop the “support” and move “Go Live” (or “Live Production” to the apex of the curve, signaling the customer that they’ll see the greatest value as we conclude the project and bring the system online.

    (Now that I read through that last paragraph, I’m less sure about my reasoning, but I’ll leave it in if you’d care to critique it.)

  5. @Steve, thanks for adding your thoughts. I am still playing with this idea and it definitely needs refining so keep the ideas coming.

    I spoke with Ron about it and we thought that adding a reverse (frown) curve which would represent the billings done on a hourly engagement. I’ll probably post an updated curve in the future.

  6. Very interesting concept Ed. I agree with your assessment which also leads to a question relative how this same concept of value can drive us to focus more on a Theory of Constraints model that drives us to increase throughput rather than effort.

    The key concept is that our clients want work that is done correctly as quickly as possible. The keys to correct work is proper scope and design and speed to deployment gets us the the other side of the “smile” as quickly as possible.

  7. Thanks, Tom. I am still rolling this around in my brain, but I do think there is something here.

  8. Matt Craig says:

    Ed – I like what you’ve done here, because you have captured the fact that projects exist within a system which delivers value (to a business typically), and the highest areas of “value leverage” are in concept, and realization/actual delivery. Generally when a project goes live, it is the point of inflexion from value potential to the start of value realization. Everything prior to go-live has almost no “real value”, in that it’s not usable by the customer yet. That would be true for iPod development for instance, no value to consumers is realized until they get to own and use one.

    So perhaps consider altering the “y-axis” title to be “value potential”?

    Then value realized would be “value potential x quality of implementation (via MOTs)” or something like that.

    Cheers,

    Matt

  9. Matt, thanks for the comment. (Especially since it revealed to me that the link to the original Stan Shih curve was busted.)

    I see your point about the y-axis as potential value, however unlike the iPod example, there is customer value in an IT (or any) consultant in helping a customer make a decision NOT to implement anything. Now, do many of them do that? I do not know.

    I believe that the majority of consultants do not want to sell or implement a system in a situation in which there is not a strong belief that the upside value potential after implementation is high.

    I do think potential value is an acceptable modification, so thanks!

  10. Matt Craig says:

    I am with you on the value of the decision. That was the reason I said “almost no value” prior to implementation, because the value that is produced is (usually) better “understanding” (of goals/scope/needs/options, etc) in the minds of the sponsor and team. That value is retained even if the “project/product” is never delivered/implemented. However to be consistent, even that is potential value, until an actual action is taken (and a result is realized).

  11. I remember seeing a curve of client satisfaction vs time. It begins with something like “Thank God I’ve found you – no other attorney seems to understand my case!” and ends with “All you did was show up in court and repeat what I told you – I could have done it myself” – or something like that. There should be some analytical value in overlaying these curves – but I’m not sure what it is yet. if anyone has seen the one I am talking about, I’d love to have a a link. One clear conclusion though is that the best time to set the price is the very beginning of the relationship, before you have imparted all your value to the client. It’a amazing how what seemed so threatening and impenetrable to a client becomes so clear and benign once you have done your job. Only problem is at that point, they are no longer impressed. It’s always tempting to “showboat” and try to show the client how much you know even before they agree to hire you – but maybe the better approach is – we know exactly what to do – just sign here and we will handle everything for you.”

  12. Excellent comments Tom!

    I think Jay Shepherd or Ron developed a smile curve for law firms.

    Ron, is it in the new book? Mine is on loan at present.

  13. Ed,

    We never did do one for CPA and law firms, though we have one in the book for advertising agencies that Tim Williams uses. But it would be very similar to your IT curve–the value is in the planning, R&D;, idea, and access to intellectual capital, not in executing the documents or doing tax return compliance.

  14. Lee Humphries says:

    I really like the ‘smile’ but it raises a question for me.
    In any organisation that’s subject to a lot of regulation (utilities as an example) the greatest ROI comes from sending in the policy wonks to influence the regulations.
    Where would that sit on the smile? Perhaps is there a ‘mono-brow’ that we currently don’t see?

  15. Lee, sadly regulatory capture or rent seeking is not accounted for on the curve. You are right it certainly causes some eyebrow stitching, perhaps even a frown curve.

  16. EDITED by webmaster.

    ICLpm is a Project Management Outsourcing company and September being Time Management month at ICL, October is Stakeholder Management. I have saved this infogram as I will apply this concept to our industry; (Real Estate Development). As the LSS is imperative I think this Smile Curve is closer to reality in our industry as the beginning of the project requires the highest amount of focus as well as the end of the curve with the most satisfaction for our clients and in turn a successful project.

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