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The Return on Investment (ROI) of Kanban - PART 1

Updated: Mar 11, 2020

“They want to see a business case before we can proceed!?” were the words of the department head I had been coaching on their planned Kanban implementation. She had some bold plans on how she could improve the performance of her division, but this question gave her some pause.

The executive team wanted to know what the payoff for the change was; could they afford to develop the capability for Kanban? What was the return on investment?

We had already spent some time understanding how work was currently being done to know that the real question was: “can we afford not to use Kanban?”

But as we often do, we focused on pragmatism, and rolled up our sleeves and got to work developing a model for how the Kanban Method materializes quantifiable business success. I hope that what was developed can help you with your pursuit of using Kanban for your business improvements.

ROI Imbalance

The first few parts of these ROI articles will focus on the economic gains of implementing Kanban. Once we’ve taken care of the top part of the ROI equation, we’ll turn our attention to the bottom half: the cost to implement. Concerning cost, our team at SquirrelNorth has experimented with various models to optimally deliver the right combination of training, coaching, and consulting to develop lasting impacts that I will share in the final parts of this article series. But there is a reason that it’s the last thing we talk about, and that is due to the imbalance between the investment costs and the economic results. The investment costs are comparatively a very small number compared to the benefits with the following implications: don’t focus too much attention on the denominator, the numerator is where the real action is!

Early and Ongoing Benefits!

Kanban’s approach has always been one of the early and ongoing improvements. The evolutionary approach to change (while good at dealing with social problems that aren’t covered in this article) also has the upside of maintaining the existing performance of an organization while at the same time allowing for process changes that expose the organization to early business improvements.

Traditional approaches to change are about installing a new process overtop the old one. Not only does this disruption introduce a (potentially long) period of poor performance, but even if improvement targets are reached the performance then plateaus with no path forward. The Kanban method avoids these social and economic risks and introduces results early and ongoing throughout its use; it is about continuous improvements.

J-Curve Change Model vs Kanban Change Model

Early forms of Kanban

With the Kanban Method, there is no such thing as “the right Kanban”, just the appropriate Kanban practices at varying degrees of organizational maturity. This approach has been codified in a model known as the Kanban Maturity Model (KMM) which maps organizational maturity against 7 levels, from 0 to 6.

Each level introduces increasingly sophisticated Kanban practices that only make sense at certain maturity levels. So, Kanban implementations can be seen through the perspective of an organization going through a series of improvements to their maturity, with the Kanban practices changing to be congruent throughout. Unfortunately, there are no shortcuts to raising an organization's maturity, i.e. no moving directly from levels 2 to 4; each level needs to be achieved one at a time, consolidating new values and practices before it’s possible to consider moving to the next level.

With this path to increasing maturity in mind, most Kanban implementations start fairly low in maturity (levels 0 to 1), something that used to be called Proto Kanban before the introduction of the KMM. It should also be pointed out that most organizations stay at this low maturity level if they don't invest in getting qualified outside help in the form of coaching and training (more on this in the future article focusing on the investing side).

Despite the low maturity of these practices, they still yield benefits. Let’s have a look at some early forms of Kanban:

Visibility – Work is now being shown in the form of a ticket on a physical or digital board. At a minimum, we now know what work has: started, finished and is yet to get started. It becomes much easier to see what is being worked on and get some basic state information.

Basic board that still yields useful information.

Reducing Concurrent Work – The introduction of the board may make it apparent how busy everyone is and aid in making decisions on where to focus the efforts of your employees. This focus has the potential to increase the amount of work that finds itself in a complete state, vs having a significant amount of “in progress” work.

Reducing Individual Overburdening – The increased focus of reducing concurrent work has the opportunity to avoid overloading your employees with too many activities. This focus can reduce incidents of unproductive and expensive overtime, and allow quality levels to be better managed.

Increased collaboration on a team – The visibility made available by a board may also offer the opportunity for increased collaboration between employees. Employees can converge around the board, see who needs help and increase the chances of collaborative opportunities.

We need to manage less while not slowing down!

More concurrent work = More work to track = More transaction costs.

With this increased visibility and limited concurrent work afforded by these basic forms of Kanban, we typically see early business benefits emerge by reducing the amount of overhead needed to manage status and track a high volume of work. Specifically, the “coordination costs” of the organization is drastically reduced.

Outlook Blue - The always full calendar that is difficult to manage with limitless concurent work.

Digital Calendars start to look increasingly sparse without the need for endless status meetings, the need for armies of project managers becomes less necessary as the management overhead gets under control. All this additional capacity freed up in the organization can be focused on other initiatives, improving the results of current initiatives, and developing the capabilities of your staff.

Quantifying the benefits of Early forms of Kanban

Our observations suggest that in the most modest of cases, the reduction of overtime and transaction costs can yield a 5-10% reduction in the cost to operate those areas using Kanban within 6 months of starting to use Kanban.

We can now use this figure as the first part of our “benefits” section of our ROI calculation. For purposes of this example, let’s say the annual operating costs of a large department in $20M, this yields a return of $1M by the end of the first year. That's like getting a whole additional team for free! These are tangible benefits and of material value, what else could the organization undertake by freeing up $1M? The news gets better because we expect to improve our maturity and our Kanban practices even further before the year is out!

Much more to come!

In the next article, I’ll explore the benefits of moving to maturity levels 2+ and quantify the benefits in the next 6 to 12 months of your Kanban implementations.

If you've enjoyed this article please continue to PART 2 as we continue to understand how we can't afford not-to-use Kanban as the benefits get even better! Also, please come to my presentation on this topic at the Kanban Global Summit 2020 in San Diego.

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