Agile and ROI

Return on Investment
Many companies rely on the concept of ROI (Return on Investment) to justify expediture on projects or products based on project future financial returns. Usually expressed as a percentage gain or loss on an investment over time, it is useful to compare profitability between different options.

Can we use ROI in Agile contexts?
Simple ROI calculations become more challenging in an Agile context however. Agile should focus more on Products rather than projects – so team size/expenditure is flexible over time, goals shift and change over time, so returns are not as stable as you would expect with a more traditional project management approach.

Agile gives better returns…
Leaving aside the question of measurement for now, we can say that, in theory, Agile should offer a better ROI than slower project management because:

  • Incremental agile product development with a strong focus on customer means products are a better fit
  • Agile allows us to focus on the highest value features of the product first – we don’t build things customers don’t need
  • Agile gets product to market faster giving us an earlier return on investment
  • Agile allows us to modify our product faster in response to customer/market changes again increasing returns
  • Team is more efficient working in an Agile way – better collaboration and communication
  • An Agile focus on higher quality software will have fewer defects, less downtime, better maintainability

OK, so how do we measure Agile ROI then?

Agile really challenges the traditional conception of ROI.   There are some things we could do to try to measure traditional ROI in an Agile context:

  • Assign value (in $ or other) to features delivered by an Agile team
  • Use analytics to measure conversion in sales (or other) for features delivered
  • Track team costs over time and compare against value of features delivered

These approaches are really trying to force a traditional accounting method onto an Agile way of working, which is not necessarily the right way to do it.  In theory Agile should improve ROI but being Agile makes ROI harder to measure.

Innovation Accounting

Eric Ries (The Lean Startup) proposes a new way of thinking about this – Innovation Accounting which has three basic steps

  1. we work in an Agile way towards an MVP (Minimum Viable Product) to test business hypotheses before we spend a lot of money on building the full product.   We iterate and experiment.
  2. As teams move towards the delivery of the MVP, they can decide whether or not to enter the market
  3. At a critical point, we must decide whether to continue, end the product or pivot – ie change the product/market segment in a significant way because evidence suggests a different way might work

This is the startup way – generally teams have a bucket of money they “burn down” which they can track.  Check out Eric Ries talking about Innovation Accounting here:

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