Calculating Business Value - Scrum Inc Home
Calculating Business ValueUnlocking Your Value Delivery PotentialAgile 2014 Orlando – July 13, 2014 2011 Scrum Inc. 2014 Scrum Inc.Presenter: Alex Brown
: Who We AreScrum Inc. is the Agile leadership company of Dr. Jeff Sutherland,co-creator of Scrum. We are based in Cambridge, MA.We maintain the Scrum methodology by: Capturing and codifying evolving best practices, Conducting original research on organizational behavior Adapting the methodology to an ever-expanding set ofindustries, processes and business challengesWe run our services company using Scrum as the primary managementframework, making us a living laboratory on the cutting edge of 䇾EnterpriseScrum䇿Find out more at www.scruminc.com. 2014 Scrum Inc.We also help companies achieve the full benefits of Scrum through our full suiteof support services: Training (Scrum Master, Product Owner, Agile Leadership, webinars, etc.) Consulting (linking Scrum and business strategy, customizing Scrum) Coaching (hands-on support to Scrum teams) Publishing and new content development
Agenda What do we mean by business value Sources of business value Different ways to measure business value How Scrum Inc. addresses business value Tiered work streams Our cadence and approach NPV per point as a unifying metric Deep dive into NPV/point analysis2 2014 Scrum Inc. Examples for different Epic types
What Is Business Value?Business Value results from theintersection of three dimensions1. What you can implement successfully andsustainably2. What your customers want and will buy(even if they don’t know it yet)3. What your team is excited about creatingWhat you canimplementWhat youcan sellWhat you arepassionateaboutShould be an explicit consideration of the organizationEstimate at Epic rather than User Story level What is the source of value that will be created?How much effort will it take to create that value? Prioritize Epics by ROI (most value with the least effort) Coordinate with your Finance Department They already have a view of production function and ROI metricsEngage them as an ally – they will love that you are speaking with them 2014 Scrum Inc.
Sources of Business ValueRiskReductionHow will completing this story allow us to: Develop or refine hypotheses about the market? Prove technical assumptions?CapabilityBuildingWill completing this story: Enable our team to do something we couldn’tbefore? Reduce or eliminate the need for low-valueactivity? 2014 Scrum Inc.MarketValueWill this feature allow us to: Sell more units? Charge a higher price? Reduce the cost of providing the product/service?
Not All Features Are Created Equal!80% ofvaluetypicallyresides in20% offeatures65% of features provide li8le to no value,are rarely used and/or aren’t actuallydesired by the customerHow can you tell ahead of Eme which featuresadd value and which don’t? 2014 Scrum Inc.The rest are OK,but not asimportant
Prioritizing Features Effectively Can DeliverRadically More Business Value2001801601201008060402010203040506070Time, Cost, Features (%)8090100 2014 Scrum Inc.Value (%)140
Methods for Determining ValueFasterBubble Sort Start at the top of a list of storiesCompare value of stories one at a timeMove the lower value story down one place in listRepeat until all stories have been compared Planning PokerPick a low value item and assign it 3 pointsUse estimation cards to independently estimate a storyShow estimates, discuss highs and lows, estimate againWhen everyone is within three cards, average the estimates Compare cost of feature creation with expectedincremental revenue of feature How many incremental units would we need to sellto equal the development cost?Break-even analysis Estimate in a lightweight way the opportunity cost of NOTcompleting a feature Often divided by feature size to get a “proxy” for ROIReturn On InvestmentMore DetailedCash Flow AnalysisNet Present Value [Total expected revenue from new feature]/total cost to develop feature] – 1 Expressed as a percent Over a reasonable planning horizon, what are therevenues and expenses associated for a feature in eachmonth? What is the net effect on cash flow over that horizon? Building on the cash flow analysis, what is the effectof including the “time value of money” in thecalculation? (i.e. a dollar today is worth more than adollar tomorrow) 2014 Scrum Inc.Cost of Delay
Four Pillars to Scrum Inc.’s Business ementsOnline contentCoachingCSM classWebinarsPublishingCSPO classConsulEngMgmt. workshopsIT, communicaEons, and webInvoicingExpense processingProposal response1. Tiering Ac6vity by CategoryCash Flow ( )2. Regular Quarterly CadenceNPV/pointPoints3. NPV/point for each Epic4. Priori6za6on of Epics 2014 Scrum Inc.Time
Scrum Inc. Activities Tiered into ParallelWorkflowsNewknowledgecreaEonGrowth andinnovaEon acEviEesEfficiencyimprovementsOnline contentValue and revenuecreaEon acEviEesCoachingCSM classPublishingCSPO classConsulEngMgmt. workshopsIT, communicaEons, and webInvoicingExpense processingProposal response 2014 Scrum Inc.Keeping theLights On (KLO)Micro‐classes
Business Value Vision Updated on a RegularCadenceMul6ple parallel planning, review, andretrospec6ve cadencesYearly Strategic goals Financial esEmatesQuarterly Epic definiEon/prioriEzaEon Release planning Financial Forecasts and goalsMonthly Actual financial performance Epic progress check‐inEach Sprint User story planning Backlog refinement Sprint goals 2014 Scrum Inc.Jan
Business Value Calculation Anchored tothe “Production Function”ProducEon FuncEon describes the mechanics by which organizaEonaccomplishes its mission.NPV/point calculaEons should link to variables in the ProducEonFuncEonAgreeing on the ProducEon funcEon helps align the product vision 1[Profit] [Units Sold] x ([Price/Unit] – [Cost/Unit]) – [Fixed Cost]2[Profit] [Monthly Users] x [Member Fee] – [Fixed Cost]3[Impact] [People Impacted] x [Magnitude of Impact] 2014 Scrum Inc.Some Examples:
Cash Flow Profile for a Typical EpicCumulaEveCash Flow ( )Investment periodReturn periodTimeMaximumRequiredInvestmentCash flowbreak evenpoint 2014 Scrum Inc.Point ofPositive Returnon Investment
Calculating Net Present ValueNWhereCt is the net cash flow in time period tr is the discount ratet is the time periodN is the total number of time periods consideredCtΣ (1 r)tt 0Cash Flow ( )Illustrative Example:C0 - 50; C4 - 30; C6 45; C10 100r is 5%100 100(1 .05)10 61.40 61t0 Today 20‐ 50‐ 25‐ 3051015Time (t) 2014 Scrum Inc.NPV 45 34
NPV/Point Drives Better Decision MakingOne metric to encapsulate return on investment1. Calculate Epic NPV2. Can also include “intangible” benefits Use Planning Poker to estimate business value relative toreference activity with known cash flows3. Estimate story points to complete Epic4. Divide total NPV by estimate of points Answers: How can we get most return with least effort? Eliminates most internal power politicsEncourage teams to think in business case termsHighlights key assumptions and variables to confirmSupports after-action review to improve accuracyImproves ability to forecast financial results 2014 Scrum Inc.Focuses team on optimizing returns
Prioritize Candidate Epics by NPV/PointMinimum level set by current Rev/point run rateNPV/pointE1E2E3E4E5NPV/Point floor(based on currentrev/point run‐rate)E6E7E8Available quarterly team capacity for Epics(based on yesterday’s weather) 2014 Scrum Inc.Points
Scrum Inc. Case Study: SetupInstall videoconferencesystem New revenue opportunity Performance improvement 400,000 advance, paid at keymilestones No additional revenues 25% at contract signing50% at draft delivery ( 12 mo.)25% at publication ( 9 mo.) Estimate 5,000 in travel andresearch expenses Estimate intangible benefit of brandbuilding at 2x reference story(reference worth 30,000) Estimate 1,500 points of effort toresearch, write and edit 5,000 in up-front expense Team estimates closer teamintegration will increase velocity byapprox. 2% Current velocity is 200pts/sprint Current revenue “run rate” is 250/pt Estimate 25 points of effort toresearch, purchase and install Assume system will needreplacement in 3 yearsWhich project should we do first?Should we do them both? 2014 Scrum Inc.Publish a book
Case Study: Calculate NPV/PointPublish a bookInstall videoconference system C13 200KNPV 358KC1 100KNPV 57KC22 100K C2‐13 ‐ 500r 10% 279/pointC1 ‐ 5,000r 10% 1,500story points 0intangiblesResearch (300pts)Writing (100pts/chapter x10)Editing (200pts)VS.25story points 2,279/pointResearch (10pts)Purchase (5pts)Install (10pts) 2014 Scrum Inc. 60K ofintangiblesC2‐36 2,000
Exercise: Scrum Café You and your team recently opened alocal restaurant. It has: A small kitchen with sink, fridgeand range-top 5 café-style tables You have been serving soup andsandwiches at lunch, have attracted asmall but loyal following, and are justbreaking even with weekly revenue of 5,000.photo credit: *Light Painting* via photopin cc Since you use Scrum to run your restaurant, you know that team velocity is100 points for each week-long sprintWhat should you do to grow your business? 2014 Scrum Inc. You have found a bank that will give you a loan at an interest rate of 7%,but they will want a compelling argument for how you plan to use themoney
Exercise: Scrum Café 2 Your team has suggested five potential enhancements:1.2.3.4.5.Get a liquor license and start serving alcoholAdd ten tables of outdoor seatingStay open for dinner as well as lunchAdvertise in the local paper or onlineInstall a high capacity espresso machine1. Using a “bubble sort” or “planning poker” approach, whichof these improvements would you complete, and in whatorder?2. Discuss each option How does it create value?What assumptions are you making, how could you verifythem?What is the estimated NPV/point?3. Does this change the order in which you would implement? 2014 Scrum Inc.
Conclusion We spend lots of time in Scrum talking aboutmaximizing business value But most companies still use very qualitativeprocesses to estimate business value Creates unresolved arguments about one petproject versus another Allows explicit comparison of feature vs. tech debt Enables explicit consideration of risk Done quarterly at the Epic level, not for every storyand sprint 2014 Scrum Inc. Using a more quantitative lens makes businessvalue explicit, and is well worth added effort
2014 Scrum Inc.Questions?
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Planning Poker Break-even analysis Cost of Delay Return On Investment Cash Flow Analysis Net Present Value Faster More Detailed Pick a low value item and assign it 3 points Use estimation cards to independently estimate a story Show estimates, discuss highs and lows, estimate again
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