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The ROI of Kanban - Part 3

Updated: May 3, 2020

(Note: Some of the numbers in the ROI example were understated in a previous version of this article. This has been corrected. Thanks to those who brought it to our attention, including Altuğ Bilgin Altıntaş and Kyle Chandler)

If you haven’t read part 1 or part 2 of this article series, please read them first and see you back here shortly.

In part 1 of this series, with the introduction of some basic Kanban, we reviewed the economic benefits of transitioning from focusing on individual contributions to that of collaboration across a team. In part 2, we saw even more quantifiable economic returns with the realization that teams also need to collaborate with other teams.

I'm really glad you made it this far because part 3 will focus on the economic results that emerge when adopting Kanban from a service-oriented lens. Many consider this to be the point where "real" Kanban begins to emerge: it has the most impact on the fitness of organizations and the economic results that come with that. The service-oriented approach represents a profound demarcation point in how Kanban is conducted, in both the scale of the economic upside and also how Kanban is rolled out.

"...even if you consider yourself a 'product company', it is the output of services that produce, maintain and deliver those products."

One of the initial hurdles to the adoption of Kanban in this way is recognizing that all knowledge-work businesses are in the services business; even if you consider yourself a "product company", it is the output of services that produce, maintain and deliver those products.

Enter the Customer

This level of Kanban begins with a better understanding of your customers and what services you provide them. Where previously the approach was about improving the flow within and between teams in an unfocused sense, we now have a specific purpose: make the services our customers consume from us as fit as possible.

This arms us with the ability to make better decisions. Perhaps we don't have the capacity for everything to flow through our teams, leading to the acceptance that we are capacity constrained and there is an imbalance between our capability and our customer demand.

In my experience, I have yet to encounter an organization that always has a match between customer demand and its capability to deliver. It would at a minimum assume a static world where customer needs never change. While not always, it is most often the case that demand outstrips the capability of an organization. This realization is a game-changer, we now acknowledge that we need to make trade-off decisions when managing for our customer's needs. Both sides of these scales can be managed: Shape the Demand and Improve our Capabilities with respect to the services we provide our customers.

In attempting to balance these two forces, we realize that customer demand and our delivery capabilities come together in the form of a complex workflow through our organization to deliver a service. Kanban introduces tools to manage this flow; the service-oriented lens reveals that our services need to navigate organizational structures that are functionally organized rather than optimized for service delivery. In short: we need to manage our way through the org chart!

The emergence of these Kanban tools however only make sense by looking through a service-oriented lens (and they are taught in the KMP program).

While this is not comprehensive (there are 150+), let's look at the basic set:

Demand Shaping Tools

  • Cost of Delay - to understand how your customer's needs tolerate delay.

  • Classes of Service - to offer different delivery capabilities based on customer need.

  • Deferred Commitment - to keep requests as optional until there is the capacity and the right business conditions to commit to starting to work.

  • Board Design - to develop ways to visualize all the customer demand to be managed; also part of capability improvement.

  • Capacity Allocation - to offer services at different magnitudes based on an explicit business strategy.

Capability Improvement Tools

  • Identify and Manage Delay - to find and manage the delays that are the property of how you've organized your delivery process.

  • Manage Lead Time - To get a better sense of your actual delivery capabilities; to quantifiably determine which of your services are fitter than others.

  • Manage Variation - To help you make better promises; perhaps even Service Level Agreements.

  • Bottleneck Handling - To find out where in your delivery processes you are the most constrained and design processes to allow work to flow regardless.

  • Decoupled Delivery Cadences - To come up with the appropriate agility strategy for your services. i.e. How quickly do I need to poll for and react to new customer demand information?

  • Feedback Loops - To have ways to understand how your services are performing, come up with improvement plans, and manage and align to the right risks and strategies.

Business benefits of Kanban with Service Orientation

The key to thinking about the benefits at this level of Kanban maturity is shifting our thinking away from improving individuals and teams. While those are good things, they do not guarantee that your customers are experiencing fitter services. This level of Kanban is about focusing on how those things come together: you've identified services that your customers consume and the delivery of those is what needs improving.

"Customers who are getting what they need in a timely manner generally are ones that will choose you more often"

Customers who are getting what they need in a timely manner generally are ones that will choose you more often - you should expect demand for your services to be at minimum maintained but more than likely increased. You're able to sell more and just as importantly deliver what you're selling because unfinished work isn't spending a lot of time waiting in the wrong places.

With the demand shaping and capability improvement tools at play, you are also not starting work that never gets completed for a number of possible reasons:

  1. it took too long to deliver and was no longer relevant

  2. it took too long to deliver and your customer requested it from someone else

  3. it was a poor choice compared to future choices that presented themselves

This never-completed work is referred to as work "abandonment", it is often observed that many services may have abandonment rates as high as 50%. If you could get rid of those abandoned items it's almost like you've doubled your delivery capacity without hiring a single person!

Throughput Increase - Abandonment reduction along with increased service requests bring about improvement in your delivery throughput: both in volume and the economic quality of the work being delivered. You should modestly expect your throughout to more than double if you can move into this form of Kanban within 12 months of your initial introduction to Kanban. *

Reduced Time to Market – The improvements to your lead time are even more dramatic than we previously experienced. Where previously the improved speed was the speed within and between teams, we now experience improved delivery speed within a whole service. When looking at a service from end to end, you should be expecting lead time improvements within a range of 50 to 90%. Along with this improved speed, you will likely also experience significantly more predictability in the delivery times; further improving your fitness as an organization that can both make and keep promises. *

* See case studies in the article Who Uses Kanban.

Benefits within the first 24 months

"...this is real top-line growth representing an organization with fitter services"

Now that we’ve identified the benefits from Part 1 & 2, we can layer in this next group of benefits to build out our business case further. With the same $20M department in mind with a 10% profit margin, here is where we are so far:

Our business case is now projecting $8.6M of economic benefits within two years of adopting Kanban, should the organization get to service-oriented Kanban. With throughput and lead time now clearly representing the bulk of the benefits, this is real top-line growth representing an organization with fitter services, more loyal customers and an overall healthier presence in the market.

"We know that customers aren't always right, but they always make choices."

We know that customers aren't always right, but they always make choices. Kanban at this level makes your customers happier, it allows you to make and keep commitments. It makes it more likely that your customers will choose you!

It should be noted however that it is rare that an organization achieves a service-oriented approach to Kanban without some help; it can come in the form of an Accredited Kanban Consultant or Coach or taking formal training (Kanban System Design - KMP1); typically organizations that get this far do both. Reading books, going to meetups, and yes articles like this one simply won't be enough; more on this in the last (Part 5) section of this series.

See you next time for Part 4, as we explore even more mature Kanban practices to build out our business case beyond year 2.

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