1
Prepared By:
Gervais Johnson
601 Montgomery St, Suite 650, San Francisco, CA 94111 | 415-678-1350 | www.MatrixRes.com
Impavid Agile
Measuring Business Value
2
Today’s Presenter
Gervais (Jay) Johnson, Agile Delivery Manager
Leads, trains, coaches teams and companies in Agile development and adoption
Architect, Application and Software Engineer, and Agile Leader for cross sector and
industry including NASA and DoD organizations
IBM - 16 Year Veteran and Thought Leader
30 Years developing applications and changing the world
Education and certifications
Certified Scrum Master and Scrum Professional
Scrum Master, Scrum Developer, Agile Expert Certified
PMI Project Management Professional
Scaled Agile Framework Program Consultant
IBM Certified Consultant, PM, SPSS, Agile Expert
Six Sigma Black Belt
3
Outline
Business Value
Agile and Business Value
Agile Economics
Business Value Definition
Scrum Inc Agile Business Value
Agile + Finance = Business Value
Case Studies
Open Discussion
4
Introductions
What is your name?
What is your role?
What prior Agile experience do you have?
0 to 10
0 = Brand New
10 = Testing Expert
5 MATRIX Confidential
The Agile Manifesto- “BE AGILE”
We are uncovering better ways of developing software by doing it and helping others do it.
“Responding to change over
following a plan”
“Customer collaboration
over contract negotiation”
“Working software over
comprehensive
documentation”
“Individuals and interactions
over process and tools”
Values
“The most efficient and
effective method of
conveying information to
and within a development
team is face-to-face
conversation.”
“Welcome changing
requirements, even late in
development. Agile
processes harness change
for the customer's
competitive advantage.”
“Working software is the
primary measure of
progress.”
“Agile processes promote
sustainable development.
The sponsors, developers,
and users should be able to
maintain a constant pace
indefinitely.”
“Our highest priority is to
satisfy the customer
through early and
continuous delivery of
valuable software.”
“Deliver working software
frequently, from a couple of
weeks to a couple of
months, with a preference
to the shorter timescale.”
“At regular intervals, the
team reflects on how to
become more effective,
then tunes and adjusts its
behavior accordingly.”
“Continuous attention to technical excellence and good design enhances agility.”
“Business people and
developers must work
together daily throughout
the project.”
“Build projects around
motivated individuals, give
them the environment and
support they need, and trust
them to get the job done,
“Simplicity -- the art of
maximizing the amount of
work not done – is
essential.”
“The best architectures,
requirements, and designs
emerge from self-organizing
teams”
Principles
8
• Why does Agile and Lean make business economic sense:
– Projects and Programs fit into one of 3 categories:
• Make money
• Save money
• Regulatory compliance
– Software is (generally) a long term investment
• Spend money up front to receive profit later
• Conversion of assets: cash -> software
– Potential reduction of tax burden via depreciation
Agile – Lean Economics
13
Agile Driving Revenue and Valuations
11%
12%
13%
14%
15%
16%
17%
19%
10%9%
9%8%
8%8%
7%7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
1 2 3 4 5 6 7 8
Rev
en
ue
Quarter
Total Market Size
Revenue - 0 Rel/Q
Revenue - 1 Rel/Q
Revenue - 2 Rel/Q
Market Share - 2 Rel/Q
Market Share - 0 Rel/Q
Market Over 8 quarters, the overall market for the product growing from $10 million to $11.4 million.
With no code released, revenue drops from $1 million per quarter to $807,000, with market share falling from 10% to 7%.
The opportunity cost of failing to release software over two years is $216,257.
However, with 2 code releases per quarter, market share goes from 10% to 19%.
http://www.cloudmunch.com/devopsROI
15
Cost of Change $
Analysis Design Code Test Install Maintenance
Project Life Cycle
Traditional
Agile
15
Agile Lowers Cost of Change
17
© 2
013 S
cru
m I
nc.
Business Value results from the intersection of three dimensions
1. What you can implement successfully and sustainably
2. What your customers want and will buy (even if they don’t know it yet)
3. What your team is excited about creating
Should be an explicit consideration of the organization
• Estimate 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 metrics
• Engage them as an ally – they will love that you are speaking with them
What you can implement
What you can sell
What you are passionate
about
Business Value Determination
Scrum Inc Way
18
© 2
013 S
cru
m I
nc.
Market Value
Will this feature allow us to:• Sell more units?• Charge a higher price?• Reduce the cost of providing the product/service?
Risk Reduction
How will completing this story allow us to:• Develop or refine hypotheses about the market?• Prove technical assumptions?
Capability Building
Will completing this story:• Enable our team to do something we couldn’t
before?• Reduce or eliminate the need for low-value
activity?
Business Value Focus Areas
Scrum Inc Way
19
© 2
013 S
cru
m I
nc.
80% of value
typically resides in
20% of features
65% of features provide little to novalue, are rarely used and/or aren’t
actually desired by the customer
The rest are OK, but not as important
How can you tell ahead of time which features add value and which don’t?
Business Value and Feature Alignment
Scrum Inc Way
20
© 2
013 S
cru
m I
nc.
Val
ue
(%)
10 20 30 40 50 60 70
Time, Cost, Features (%)
80 90 100
200
180
160
140
120
100
80
60
40
20
Business Value Prioritization
Scrum Inc Way
21
© 2
013 S
cru
m I
nc.
Bubble Sort
Planning Poker
Break-even analysis
Return On Investment
Cash Flow Analysis
Net Present Value
Faste
rM
ore
Deta
iled
• Start at the top of a list of stories• Compare value of stories one at a time• Move the lower value story down one place in list• Repeat until all stories have been compared
• 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• When 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 sell to equal the development cost?
• = [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 ineach month?
• What is the net effect on cash flow over that horizon?
• Building on the cash flow analysis, what is the effect of including the “time value of money” in the calculation? (i.e. a dollar today is worth more than a dollar tomorrow)
Business Value Prioritization Techniques
Scrum Inc Recommendation
Scrum Inc Way
22
© 2
013 S
cru
m I
nc.
2. Regular Quarterly Cadence
Invoicing
IT, communications, and web
Expense processing Proposal response
New knowledge
creaEon
Efficiency improvements
Online content Webinars
Coaching Publishing ConsulEng
CSM class CSPO class Mgmt. workshops
1. Tiering Activity by Category
Cash Flow($)
3. NPV/point for each Epic
NPV/point
Time
Points
4. Prioritization of Epics
Scrum Inc Business Value Process
Scrum Inc Way
23
© 2
013 S
cru
m I
nc.
[Profit] = [Units Sold] x ([Price/Unit] – [Cost/Unit]) – [Fixed Cost]
• Production Function describes the mechanics by whichorganizaation accomplishes its mission
• NPV/point calculaations should link to variables in theProduction Function
• Agreeing on the Production Function helps align the product vision
Some Examples:
[Impact] = [People Impacted] x [Magnitude of Impact]
1
2 [Profit] = [Monthly Users] x [Member Fee] – [Fixed Cost]
3
Production Function Business Value
Scrum Inc Way
24
© 2
013 S
cru
m I
nc.
Maximum Required Investment
Cash flowbreak even
point
TimePoint of Positive Return on Investment
CumulaEve Cash Flow ($)
Investment period Return period
Cash Flow Business Value
Scrum Inc Way
25
© 2
013 S
cru
m I
nc.
CtΣ(1+r)tt=0
N
WhereCt is the net cash flow in time period tr is the discount ratet is the time periodN is the total number of time periods considered
Illustrative Example:C0 = -$50; C4 = -$30; C6 = $45; C10 = $100
r is 5%
$100
$61
Cash Flow ($)
-‐$30
$45
5 10
NPV =
t0 = Today
$34
-‐$25
100
(1+.05)10= $61.40
15
Time (t)-‐$50
$20
NPV Business Value
Scrum Inc Way
26
© 2
013 S
cru
m I
nc.
One metric to encapsulate return on investment
1. Calculate Epic NPV
2. Can also include “intangible” benefits
• Use Planning Poker to estimate business value relative to reference activity with known cash flows
3. Estimate story points to complete Epic
4. Divide total NPV by estimate of points
• Answers: How can we get most return with least effort?
Focuses team on optimizing returns
• Eliminates most internal power politics
• Encourage teams to think in business case terms
• Highlights key assumptions and variables to confirm
• Supports after-action review to improve accuracy
NPV = Improved Decisions
Scrum Inc Way
27
© 2
013 S
cru
m I
nc.
Points
Available quarterly team capacity for Epics (based on yesterday’s weather)
NPV/Point floor (based on current rev/point run-‐rate)
NPV/point
E1
E2
E3
E4E5
E6
E7E8
NPV/Points and Epics Prioritization
Scrum Inc Way
28
• CapEx – Capital Expenditure– Capitalizing the cost of the asset (software)
– Spread the cost of the asset over its life
– Reduce tax liability against future revenue
• OpEx – Operational Expense– Take the hit now
– Expense in the current period
– Too many expenses erase profitability and destroy shareholder wealth
CapEx and OpEx
29
• Financial Accounting Standards Board (FASB) interprets the laws to provide Generally Accepted Accounting Principles (GAAP)
• International Accounting Standards Board (IASB) interprets the international laws to provide International Financial Reporting Standards (IFRS)
• FASB and IASB– FASB 86 – Defines standards for software to be sold or
otherwise marketed
– IAS 38 – Intangible Assets
Financial Standards and Regulations
30
• It’s a common misconception that Waterfall projects are easier to capitalize
• GAAP and IFARS are slanted towards Waterfall capitalization
• General Rule:
– If you can capitalize a Waterfall Project, you can capitalize an Agile Project
– More accurately, more transparently, and with finer granularity
Software Capitalization and Agile
• Misunderstandings
• Agile projects are difficult to track CapExand OpEx
• R&D is an expense - Nokia
• Innovation time is an expense –Nokia/AT&T
– Google 20% Rule
• Gives finance greater control and visibility on innovation
– Innovation Sprints
31
Analysis TestsCodingDesign Deploy
AnalysisDesignCodingTests
Deploy
Spri
nt
0
AnalysisDesignCodingTests
Deploy
AnalysisDesignCodingTests
Deploy
AnalysisDesignCodingTests
Deploy
AnalysisDesignCodingTests
Deploy
Maint
Agile Capitalization Improves Financial
Statement
32
• If we are following Scrum, we can start capitalization in Sprint 1
– Assuming sprint 1 has points, it will be delivering value.
• The Project has been authorized and funded
• It is expected that the project will be completed and the software will be used to perform the function intended.
• New or upgraded software functionality is being developed
– Note: solely extending the software’s useful life without adding additional functionality is a maintenance activity(OpEx)
Agile Capitalization Starts Early
• Epic and Story Point Captilization Requires a paradigm shift
– Only assign points to business value stories
• See the “so that,” <business value> part of the statement
– Bugs and Spikes are relegated to OpEx
• No Points
– User stories must be written to deliver business value in order to be capitalized
– Must apply to all projects as a policy
• User stories can determine if value is being added to existing software
– Very important for capitalizing “internal use” software
• Velocity now measuring delivery of business value
33
How can capitalization of software assetscan limit your tax liability?
• Deprecation
– Distributing the cost over the life of the asset ( software)
– Becomes part of the declared assets of the company
• Effect on P&L: Agile vs. Waterfall
– Agile and Lean Programs and projects reduce waste
– “All we are doing is looking at the timeline, from the where the customer gives us an order to where we collect the cash. And we are reducing the timeline by reducing the non-value added wastes.” —TaiichiOhno
Agile Capitalization Improves P&L
• Longer term software projects that are designed to produce revenue or cost savings
• Adding features which will increase revenue or cost savings (i.e. business value).
• Hardware/Infrastructure (maybe)
– If it is tied to software features which are are being capitalized
34
• Sprint 0, Release and ART Planning Meetings
• Your team fixes regression bugs in a released product, while it develops new features,
• Your team is creating a product for international release, and is localizing the product for multiple languages,
• Your team (not just its software) manually converts data from one form to another,
• Your team helps train people to use the software,
• Your team participates in operations activities beyond deployment, such as monitoring, reporting, backup, machine configuration,
• Your team performs routine Sarbanes-Oxley (SOX) or security reviews [15 USC 7211],
• Your team refactors code unlikely to be relevant to new functionality (you probably shouldn’t do this anyway),
• Your team modifies software to support individual customers.
Non-Allowable Agile Capitalization
35
Credit: Dan Greening
Agile P&L Scenarios
• Misunderstandings in how to track and report agile project costs have cost companies millions of dollars in improper taxation
– Better use of money, increases shareholder wealth and makes more funds available internally.
• Poor capitalization rules create choppy income statements for companies, making them look poorly managed
– Company assets and expenses look unstable
– Expensing the wrong things destroys shareholder wealth
36
• CapEx
– Customer facing, revenue generating
– Long term economic value (greater than a year)
– You're selling software
• OpEx
– Sprint 0, Release Planning, Requirements Gathering
– HIP Sprints (SAFe)
– Short term software projects thatreceive no value
• Hybrid projects
– Need to track both!
Agile CapEx and OpEx Rules
• Force engineers to track hours (degrading their creativity and productivity with mind-numbing work-tracking),
• Undercapitalize software development (leaving huge sums on the table), or
• Reclassify past expenses and restate earnings (raising investor questions about the stability of the company).
– Agile projects are not preliminary stage work
• Companies often capitalize the wrong thing or try to extend the project beyond its useful life
37
• Agile Release or ART Opportunities:
– Acknowledges sunk costs
• Shut down the project at any point
– Don’t spend more than you need to
• Project is done when the value delivered < cost
• Agile Release or ART Challenges:
– MUST have Lean/Agile Finance department that understands to the value stream
– Release funding must happen in hours/days not weeks/months
– Finance must collaborate with the Agile team
Agile Funding Practices
38
• Dates are fixed, easy to track
• We know exactly which team(s) did the work
• Day-by-day task burndown
• Stories, Features, and Epics are traceable in the Agile tools
• PBI is well documented and easy to understand, thanks to User Story Format
End result: more verifiable, better documented production data and more closely aligned with customer value
Finance and Auditors Like Agile
39
• Training of Finance in Agile Frameworks (high level)
– SAFe – Scaled Agile Framework for Enterprise
• Training of Scrum Master in CapEx vs. OpEx
• Collaboration
– Finance MUST attend (at a minimum) Release/ART Meetings
– Product Owners MUST treat Finance as a stakeholder and inform them of changes to the release and sprint goals
• Metrics
– To track and predict sprint and release goals
• Project ROI tracking
– Did we achieve the value we said we would?
– Inquiring shareholders want to know
• Implement lightweight Business Cases
Agile Frameworks with Business Value
4040
https://less.works/less/framework/index.html
http://www.scaledagileacademy.com/
http://www.disciplinedagiledelivery.com/agility-at-scale/
Popular Agile Frameworks
4141
http://www.scaledagileacademy.com/
SAFe Economic View
#1 Take an economic view#2 Apply systems thinking#3 Assume variability; preserve options#4 Build incrementally with fast, integrated learning cycles#5 Base milestones on objective evaluation of working systems#6 Visualize and limit WIP, reduce batch sizes, and manage queue lengths#7 Apply cadence, synchronize with cross-domain planning#8 Unlock the intrinsic motivation of knowledge workers#9 Decentralize decision-making
Epics
Capabilities
Features
Stories
Contextual and Traceable Value
42
http://www.scaledagileacademy.com/
SAFe and Business Value
Introduce the Enterprise with multiple Portfolios• Enhance Lean-Agile Budgeting with Value
Stream funding, CapEx and OpEx• Organize around value• Coordinate Value Streams in a Portfolio
Fund Value Streams, not projects• Fund Value Streams• Portfolio Backlog does not need a separate
budget reserve• Value Stream mgmt has authority to move
funding between ARTs (agile release train)• CapEx & OpEx (NPV)
A Value Stream is a fundamental thinking construct in lean - Each Value Stream is the sequence of steps used to delivervalue to the customer
1. Operational Value Streams Used to deliver end-customer value (order processing, CRM, shipping, tracking, billing)
1. Development Value Streams Development of the systems and capabilities that enable operational value (teams that develop systems)
43
• Standard ROI/Payback ignores risk and time-value of money
• Use Net Present Value instead
– Use sensitivity analysis to vet hurdle rate
– Mobile Phone Developer used 10% for familiar Software Projects
– Airline Used 15%
• Many companies use Agile Metrics to track (and predict) CapEx
– Time to Market
– Planning Predictability
– Scope Released
Summary and Examples
• Finance and business leaders are brought up to speed
• Could start capitalizing story points now, just need to sort out which story points are delivering value
• Scrum Masters promote capitalization processes
• IT and Finance Leadership to provide project funding guidance
– CapEx, OpEx, Hybrid using lightweight business cases
– Only assign points to business value stories
• Increase the maturity of the Agile Enterprise
– Especially in planning activities
– Implement Change Management as part of the Agile Adoption Roadmap and include Finance
44
Agile Transformation Mind
1. Lean/Agile/DevOps is about transforming
business models, business performance,
and application development and delivery in
order to accelerate digital innovation.
So it is a topic for both business and IT roles
in the organization.
2. You don’t buy Change, you do Agile. Agile is anapproach, a mindset – a combination of culture, processand technology (including infrastructure, tools andservices).
3. Agile is not only about the hand-off between Business and IT. Agile is about applying lean andagile principles across the business organization and application delivery lifecycle (biz-dev-test-deploy- operate) to achieve continuous delivery ofdigital innovation.
• Map your Delivery Pipeline to find the
bottlenecks!
45
1
Get Mapped – Agile Adoption Transformation Roadmap
Value Stream Mapping Workshop
Assess current state & determine bottlenecks
Define operational framework – organization, process, technology
Define actionable, prioritized roadmap with pilots
*** Include Executives, Finance, Product, marketing, Sale. Technology, Services
2Build & Pilot
Build / create the DevOps framework
Address gaps between current state and end state
Conduct pilots
3Optimize & Expand
Optimize framework
Onboard next set of applications
Continue to monitor and measure impact
Start Here
© IBMCorporat
45
Starting is Easy
46
Steve Farley, VP Application
Development Center,
Nationwide Insurance
Carmen DeArdo, Director,
Build Technology Leader,
Nationwide Insurance
© IBMCorporat
46
Nationwide Insurance Case Study
47
Gareth Wharton,
CTO, Hiscox
Snehal Antani,
CIO CDF & CIO EA,
GE Capital Americas
“We built software and apps,
such as our award-winning bank
– GECapitalBank.com – from
scratch in weeks to months –
instead of months to years.”
© IBMCorporat
47
GE and HISCOX Case Studies
49
2015
2016+
2013
Roadmap &
Alignment
2013
Roadmap &
Alignment
Optimization
& Agility
Leverage
& Elevation
2014
Integration &
Standardization
Va
lue
Ca
pa
bil
ity
& E
na
ble
me
nt
Va
lue
Ca
pa
bil
ity
& E
na
ble
me
nt
Customer Driven Focus & Value SustainabilityCustomer Driven Focus & Value Sustainability
Become More Agile
Leverage our Scale
Extend The Global Network
The journey begins with the PECs
alignment on an Integrated PepsiCo
Operating Model (POM)
Holding / Hybrid(Loosely Related)
Divisional(Closely Related)
Organizational Structure
2012
Foundation &
Commitment
2012
Foundation &
Commitment
Design Ideas
PepsiCo Case Study
50
Delta Airline Case Study
• Mobil Application
– Goal: only fund what we need. Return the unused project funds to fund other projects
– Tried (and failed) funding by release
– Went back to funding by project
– Money NEVER got returned
– Took 3 months to get funding approved
– Lesson Learned: This only works if you have an Agile finance dept
• Large Mobile Phone Developer used 6 month rolling wave budget planning.
– Seemed to work fine
– Week to 10 day approval cycle
• Standard ROI/Payback ignores risk and time-value of money
• Use Net Present Value instead
– Use sensitivity analysis to vet hurdle rate
– Mobile Phone Developer used 10% for familiar Software Projects
– Airline Used 15%
• Airline used Agile Metrics to track (and predict) CapEx
– Time to Market
– Planning Predictability
– Scope Released
52
Impavid Agile Future Topics for Discussion
Agile and Change Management
DevOps
Agile Transformation
Cynefin Framework
Executive Influence