Value Creation/Innovation

Value Creation/Innovation:

Exploring Value Creation Theories

By Russ Wright

Value Creation

Value creation or innovation as defined in the question above, focuses on creating new products and new ideas within the field of software development. There is much debate in the literature over how value is created within software development. Some literature focused primarily on the economy of software development (Boehm, 2003; Boehm & Sullivan, 2000). Others took a more holistic approach and realize that the culture and process have the greatest effect on the ability to innovate (Highsmith & Cockburn, 2002; Karlsson & Ryan, 2002; Little, 2005; Prahalad & Ramaswamy, 2004; Quinn, Baruch, & Zien, 1996). Regardless of the path taken to explain value creation and innovation in software development, the general agreement was that the process needed to change to better fit the challenges and opportunities of a global market. Inasmuch, this paper will explore the value creation theories related to software development and the additional challenge of outsourcing to create innovation.

The purpose of this document is to explore how an organization can create value in the software development process. There is a discussion of the background on value creation within the context of agile software development principles, which contain many ways to innovate. This document also explores the theories of outsourcing software development and how they relate to value creation or innovation within agile development. The conclusion finds that creating value in software development is still a topic up for debate among scholars and that outsourcing can add value but is full of pitfalls.

Value Creation Theories Related To Software Development

Achieving value creation has slowly changed the way software is developed into a set of methodologies loosely called agile software development. Research conducted by Fowler and Highsmith (2001) concluded that the agile development philosophy and methods sought to remove cumbersome and time-consuming barriers to value creation. The authors instead supported a philosophy of software development that focused on the individuals, their interaction, creating working software, collaboration with the customer and quick responses to change. There are several theories of value creation or innovation embedded within the principles of the agile philosophy of software development. Therefore, several of these embedded value creation theories are explored below.

Customer Defined Software Value

One theory of value creation in software development is that customer satisfaction is achieved by delivering software that the customer actually values. According to research by Highsmith and Cockburn (2002), the authors explained that within the agile development methodologies the customer defined value for the project and set the measurement of success. For software to be valuable the customer had to find that the product not only met their needs, but also was usable and useful (Constantine & Lockwood, 1999). In an article on agile methodology, Boehm (2002) explained that generating value in the development process for the customer was achieved by emphasizing customer involvement in the development process over the traditional contract negotiation. Consequently, value creation comes from the ability of the customer to define the measure of success, including usability and usefulness of the product and their involvement in the development process as a team member. Making the customer a member of the team means that the requirements might change, many times and even late in the process.

Requirements Changes

A change in the requirements for an application, even late in the development process allows a customer to build in greater value to the product. The ability to prioritize the customer’s requirements through a cost-value approach produced a win-win result when creating software products (Karlsson & Ryan, 2002). Prahalad and Ramaswamy (2004) explained that changed requirements happened because the customer and development team developed a greater understanding of the customer’s needs. Recent research conducted by Paetsch and Eberlein and Maurer (2003) explained that the ability to adapt to the changing situation in the software development project created more value than prediction of the customer’s requirements. A study by Cao and Ramesh (2008) offered a warning against too much change in requirements leading to project failure because the customer never saw the software product. Thus the ability to change requirements is a positive, yet too much change can prevent a usable product from being delivered.

Quick Delivery

The ability to deliver the software quickly builds value for the customer. According to a recent study by Quinn, Baruch and Zein (1996) quick delivery of the software product made a significant difference in the ability to compete in the global market. Larman (2004) explained that innovation was accomplished when the developers, through an iterative cycle, delivered a working product to the customer, which allowed the customer to see the progress and adjust requirements quickly to the changing market. Yet, Nurer Mahapatra and Magalaraj, (2005) in a recent paper cautioned that organizations who attempted to adapt to agile methods that delivered quickly could fail because they were often unprepared for the radical change in behavior. Therefore, quick delivery of the software product builds value by allowing the customer to adapt and refine the product but also holds a potential for disaster if not managed well. Managers, customers and developers have to work together well to build value.

Collaboration with Managers

The development team and managers must communicate daily to build value in the development process. Cohn and Ford (2003) explained that managers had to adapt to a new style of leadership where they were required to relinquish some of what they perceived as control. The authors posited that traditional development plans which offered specific delivery dates were probably padded and inaccurate and instead needed participation to see that they could deliver the product quicker and with less resources. According to research conducted by Patton (2002) the regular discussions with managers added the benefit of clearing roadblocks and bottlenecks, which would slow down the project and add costs. The managers were also able to see how the product met the customer’s needs. A study conducted by Augustine, Payne, Sencidiver and Woodcock (2005) explained that without the constant communication, managers would often fall back into trying to manage the project using linear approaches as they attempted to gain control of the project, which lead to lost time and possibly project failure. As a result, the constant communication with managers helps create value by not only keeping them informed but also empowering them to clear obstacles that might slow down delivery. Managers can also provide considerable motivation and support to help create value in the software development process.

Motivation and Support

The motivation and support of the management team has a significant impact on the value creation in software development. According to research conducted by Ceschi, Sillitti, Succi and Panfilis (2005) into development project success factors found that team members ranked motivation from management in the form of support and training as among the top key factors for innovation. The study further showed that managers agreed that their support was a significant factor in the success and value creation within the project. A recent study conducted by Asproni (2004) into the benefits of motivation from management in software development teams showed that highly effective teams benefited most and achieved the best results when management provided among other factors, clear elevating goals, a unified commitment to the project and a collaborative climate. The study further explained that this support gave the team members the ability to innovate and build better quality software, often with fewer resources. A research survey conducted by Forward and Lethbridge (2002) found that the management team provided a significant impact on the performance of the development process when they provided the team with the proper tools to improve automation in the development process. The team saw these tools as support and found motivation to perform at a higher level. Inasmuch, support and motivation from management has a reciprocal effect on the development process and the ability of the developers to innovate and create value.

In Person Meetings for Tacit Knowledge Transfer

Value creation can be significantly effected by the ability of team members to meet and share knowledge. Nonaka and Takeuchi (1995) drew on the work of Polyanyi (1966), and explained that tacit knowledge was personal, context specific and difficult to explain. They further explained that this knowledge, gained from experience, can be lost if an individual leaves an organization and does not share it. Likewise the members of a development team, which includes the customer, must meet often to share knowledge to establish the context of the requirements and build new knowledge, which creates value (Dyba & Dingsayr, 2008). Cohn (2004) explained that when teams met to transfer knowledge, the use of stories to explain the requirements helped to build up individual and group knowledge as they shared. The author does warn that this process might not work well in really large teams, but did acknowledge the positive impact of tacit knowledge sharing on innovation. A recent study conducted by Chau, Maurer and Melik (2003) found that knowledge sharing within agile development teams, particularly when done in face-to-face settings helped to build trust among team members and increased the team’s ability to function together. Therefore, sharing of knowledge among team members, especially in face-to-face formats helps build team trust and create value in the development process.

Working Software as Measurement Of Success.

The ability for management to measure the progress of a development project has a significant impact on the ability of the software development team to create value. Boehm and Turner (2005) explained that agile development processes do not include the typical milestones and other measurement techniques common to traditional development methods. They further explained that the completed functional stories could serve as a replacement for these measures as they showed the amount of work completed on a particular development phase. A case study by Fitzgerald, Hartnett and Conboy (2006) demonstrated that the ability of the management team to measure the progress of the team, based on the amount of working code, increased the project performance by reducing the amount of paperwork needed in the previous traditional software development projects. The developers spent less time writing reports and more time on the actual development, which accelerated the development process. In a recent report, Lapham, Williams, Hammons, Burton and Schenker (2010) explained that progress within an agile project was measured by gathering the customer’s value assigned to each completed part of the development project. As these pieces were completed, they were used as a measure of how much the customer valued the product at that time. Thus, the ability of management to measure progress, along with the customer’s assigned value at each phase of development adds value to the project, particularly because it reduces the reporting workload on the development team freeing them to perform more development tasks.

Realistic Schedules

The proper attitude towards development cost and schedule when managing a project will have an impact on the development team’s ability to create value. Glass (2001) explained that successful projects had a realistic schedule that was not a death march to finish the project and the developer worked a normal workweek. Developing innovative products did not require that the software development projects be managed by the schedule or costs, as it would have distracted from the real objective of creating a profitable product that met customer needs and gave a competitive advantage (Poppendieck & Poppendieck, 2003). Likewise, and exploratory study by Begel and Nagappan (2007) explained that one of the benefits of implementing agile software methods was the flexibility of the process which gave the developers the ability to change directions when a rigid schedule would not have worked. So, a tight management of the schedule and costs, as is common in traditional development processes would inhibit value creation because they lacked flexibility.

Technical Excellence

The quality of skill for each member of a development team will have an impact on the value creation ability of an organization. An organizational culture that supported and provided opportunities for growth in skills was desirable because it lead to productivity (Wendorff, 2002). A recent study conducted by Chow and Cao (2008) showed that team capability and delivery strategy ranked highest as critical success factors. Technical excellence also extended to the tools used by the software development team, as good quality tools impacted the ability of the team to innovate (Hanssen & Fægri, 2008). For these reasons, a skilled software development team equipped with the proper tools and supported by opportunities for growth is an important factor for innovation and value creation in software development.

Keep It Simple – Maximize Effort

The design of the software program can impact the ability of the software development team to create value in the development process. In the agile development process, one of the first steps is writing the test for the specific functionality. By writing the test for the code first, the developer would write code to the test and minimize the additional code needed to meet the test requirements and functionality (Poppendieck & Poppendieck, 2003). In a recent paper by Lindstrom and Jeffries (2004) the authors explained that value was achieved by keeping the design as simple as possible so that the design matched the functionality and included no additional wasted motion. They further explained that the design was regularly reviewed to keep effort to the minimum and maximize efficiency. Hence, value creation in software development can be improved by coding only what is required and reviewing the code regularly to increase efficiency.

Team Self-Organization

The ability for a software development team to reorganize themselves into different configurations as the situation dictates can affect the organization’s ability to innovate. Cockburn and Highsmith (2002) explained that the ability of a software team to reorganize as the situation dictated was important for making decisions quickly and dealing with ambiguity. A recent paper by Decker, Ras Rech, Klein and Hoecht (2005) explained that the ability to reorganize as a development team allowed for the reuse of engineering knowledge in new projects. The benefit of knowledge reuse was a key factor in the reasons given for reorganizing the team to fit the new situation. Yet, there is reason to show caution when attempting to use a self-reorganizing team philosophy. A study conducted by Moe, Dingsoyer and Dyba (2008) found that the very specialized skills of certain team members and the uneven division of work among the team presented barriers to realizing a true self-organizing team. Therefore, value creation, in regards to self-organizing teams depends upon the ability of a development team to reorganize quickly to meet new challenges, and the balancing of skills and workload within the team.

Team Reflection

The ability for a development team at regular intervals to reflect upon the entire project can impact the ability of the team to create value. According to research conducted by Salo,Kolehmainen, Kyllönen, Löthman, Salmijärvi and Abrahamsson (2004) the post-iteration workshops provided significant help to improve and optimize practices and enhance the learning and satisfaction of the project team. The authors further explained that the cost of the workshops was quite small, and the benefits quite large. Cockburn (2002) echoed this same idea and explained that the after process reviews were helpful in growing the skill of the team and improving the skill sets of the participants. A review at the end of the development cycle where the participants shared their experiences significantly enhanced the development process (Dingsøyr & Hanssen, 2003). Thus, reflection builds the ability of a software development team to innovate by improving and optimizing the team practices.

Within each of the principles behind agile software development are theories of value creation for a software development team. By allowing the customer to set the measures of success within the product, brings value creation by building trust. The ability to adapt to changing requirements allows the development team to innovate and meet the customer’s needs. Quick and often delivery of a working product, even if it is not complete, builds value for the customer and the development team as they both gain credibility. Constant communication with management helps to build trust in the team and give them the freedom to innovate and create value for the organization. Closely related to this theory is the need for management to be able to measure progress by measuring the completeness of the project. By using the completeness of the project for measure the management is able to see progress and eliminate additional paperwork for the developer, which freed them to write more code. Also related to management was using other measures instead of cost and schedule as they would detract from the real goals of the project. Another way that value is created is through the support of management with proper training and tools, which brings about excellence. The adaptable and self-organizing team, a difficult goal to reach, also brings about value creation by allowing the team to adapt to the fluid situations found in software development. And lastly, one of the important and relatively inexpensive ways that a software development team can create value is by reflecting regularly on the development process and integrating the lessons learned, thus constantly improving the ability to innovate.

Value Creation Theories and Outsourcing Of Software Development

So far the exploration of value creation has focused on software development teams in local settings. The additional factor of distance between the development team and the customer or another development team, or even members of the same team presents some additional factors for innovation as well as failure. A review of the current literature shows much disagreement about the benefits and potential for success when outsourcing the development of software. Some of the theories, both pro and con, related to value creation, agile development and outsourcing are explored below.

Effects on Many Levels

Outsourcing of software development in general creates new opportunities for value creation, but also brings many challenges. A recent paper by Hersleb and Moitra (2002) explained that the separation of the software development team over the globe could add many problems. These problems included how the project manager divided up the work and how they handled resistance to the process. They further added that many cultural issues, including the attitude towards management, perceptions of time and communication styles all contributed to the successful outsourcing of a project. A paper by Agelfalk, Fitzgerald, Holstrom, Lings, Lundell and Conchuir (2005) explained that the process of communicating between team members, coordination of activities and control of the project were all challenged by distance. The authors further explained that only when strong supporting processes were in place could the outsourced project work. Hence, the challenges of distance, communication, culture and command and control in an outsourced software development project must be addressed with strong supporting principles and methodologies, like agile, to support value creation.

Even if an organization uses agile methods, because of the focus of the processes for dealing with ambiguity, change and communication, to create value in an outsource project, there are still many challenges that must be overcome. According to research by Carmel and Agrawal (2002) the authors identified three critical challenges of outsourcing software development as: (1) coordination, (2) control and (3) communication. Coordination was defined as integrating tasks across each unit so they all contribute to the whole. Control was defined as following the goals, policies and standards of the organization. Communication was defined as the exchange of information that is understood by those communicating. Thus, an understanding of how to deal with these three critical challenges is required to achieve value creation when outsourcing. Each of these challenges to outsourcing of software development, within the context of agile development principles, is explored further below.


The division of tasks when outsourcing software development can impact the ability of an organization to create value. According to Shrivasta and Date (2010) agile teams that were distributed across too wide of a time zone difference suffered from poor performance as they had little overlapping time to coordinate activities. One possible solution to coordination problems suggested by the research of Carmel, Espinoza and Dubinsky (2010) was handing off the work from one site to the next toward the end of the work day going around the globe in the direction of the sun. The authors admitted that this solution was still not entirely proven, yet did present a method that might help in the coordination of distributed software development teams. Another possible solution to the problems of coordination suggested by the research of Wahyudin, Matthias, Eckhard, Schatten and Biffl (2008) was the use of a notification software tool that supported the agile development methodology and managed the interdependent tasks, which gave the project manager and the team members a way to coordinate activities. Hence, the coordination of tasks by the project manager and team members must be managed well to achieve value for the software development project.


Adherence to organizational policies, goals and standards can impact value creation when outsourcing software development. In his research of outsourcing strategies Jennings (1997) explained that one of the most important factors for successful outsourcing was protection and development of the core capabilities that gave an organization their competitive edge. According to research by Sutherland, Schoonheim, Rustenburg and Rijk (2008) the authors found that exceptional productivity, and therefore value creation, in a development project among distributed teams was possible when the teams fully integrated the agile method into their development teams. This was achieved by bringing the teams together, instilling the agile goals and methods and then separating them. The authors acknowledged that the time spent instilling the agile principles and philosophy was a major contributing factor for success. Therefore, instilling the relevant goals and standards, especially the principles of agile development as mentioned above, gives a competitive edge, contributes to the success of outsourced projects and helps build value.


The most important factor for value creation when outsourcing software development is communication. Research conducted by Sutherland, Viktorov , Blount and Puntikov (2007) showed that communication, particularly when crossing cultures presented a significant obstacle as it limited productivity. The authors further explained that the solution that worked best was a full integration of the agile teams with members distributed around the globe as opposed to teams divided by geography. They argued that although this method slowed down the development process some when compared to an agile project done in a local space, it increased communication and built trust among the team members. A recent research paper by Shrivasta and Date (2010) concluded that knowledge management and communication were among the major problems encountered when software development was outsourced. They proposed an interesting solution were the agile teams used a web-based knowledge management wiki to assist in the capture of experiences. They further suggested that teams should still be brought together at different times in the development process and work together to build trust. Hence, a solid plan for communication among distributed software development teams is required to achieve value creation.

No Easy Answers

Agile software development philosophies and methods provide many opportunities to create value in software development. Much of the research into agile shows the potential for value creation when an organization is willing to embrace the philosophy and create a culture that supports and celebrates innovation. The process of embracing the philosophy and building the culture will take time and training on all levels of an organization to see the process happen. There is still much to be researched and solved to realize true value creation when outsourcing software development. Agile methods hold much promise, but still face many challenges to make the process work with teams spread across the globe. For an organization that already uses agile development principles, outsourcing might create additional value. For an organization that already has outsourced projects, adding agile development principles might also increase innovation. However, an organization with weak development procedures would risk much by trying to add agile principles and outsource at the same time and are likely to reduce instead of improve value creation.


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