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Business Value ofAgile MethodsUsing ROI & Real Options

Dr. David F. Rico, PMP, ACP, CSMTwitter: @dr_david_f_ricoWebsite: http://www.davidfrico.comLinkedIn: http://www.linkedin.com/in/davidfricoFacebook: http://www.facebook.com/profile.php?id=1540017424Author BackgroundDoD contractor with 28+ years of IT experienceB.S. Comp. Sci., M.S. Soft. Eng., & D.M. Info. Sys.Large govt projects in U.S., Far/Mid-East, & Europe

2Published six books & numerous journal articlesAdjunct at George Washington, UMUC, & ArgosyAgile Program Management & Lean DevelopmentSpecializes in metrics, models, & cost engineeringSix Sigma, CMMI, ISO 9001, DoDAF, & DoD 5000Cloud Computing, SOA, Web Services, FOSS, etc.Todays Whirlwind Environment3OverrunsAttritionEscalationRunawaysCancellationGlobalCompetitionDemandingCustomersOrganizationDownsizingSystemComplexityTechnologyChangeVagueRequirementsWork LifeImbalance

InefficiencyHigh O&MLower DoQVulnerableN-M BreachReducedIT Budgets81 MonthCycle TimesRedundantData CentersLack ofInteroperabilityPoorIT SecurityOverburdeningLegacy SystemsObsoleteTechnology & SkillsPine, B. J. (1993). Mass customization: The new frontier in business competition. Boston, MA: Harvard Business School Press.Pontius, R. W. (2012). Acquisition of IT: Improving efficiency and effectiveness in IT acquisition in the DoD. Second Annual AFEI/NDIA Conference on Agile in DoD, Springfield, VA, USA.Software in U.S. DoD SystemsKennedy, M. P., & Umphress, D. A. (2011). An agile systems engineering process: The missing link. Crosstalk, 24(3), 16-20.No. of software-intensive systems is growing80% of US DoD functions performed in softwareMajor driver of cost, schedule, & tech. performance4

Traditional Projects5Big projects result in poor quality and scope changesProductivity declines with long queues/wait timesLarge projects are unsuccessful or canceledJones, C. (1991). Applied software measurement: Assuring productivity and quality. New York, NY: McGraw-Hill.Size vs. QualityDefect Density0.003.206.409.6012.8016.0002625100400

Lines of Code (Thousands) Size vs. ProductivityCode Production Rate0.001.002.003.004.005.0002625100400Lines of Code (Thousands) Size vs. Requirements GrowthPercentage0%8%16%24%32%40%02625100400Lines of Code (Thousands) Size vs. SuccessPercentage0%12%24%36%48%60%02625100400Lines of Code (Thousands)

Global Project Failures6Standish Group. (2010). Chaos summary 2010. Boston, MA: Author.Sessions, R. (2009). The IT complexity crisis: Danger and opportunity. Houston, TX: Object Watch.Challenged and failed projects hover at 67%Big projects fail more often, which is 5% to 10%Of $1.7T spent on IT projects, over $858B were lost

16%53%31%

27%33%40%

26%46%28%

28%49%23%

34%51%15%

29%53%18%

35%46%19%

32%44%24%

33%41%26%0%20%40%60%80%100%199419961998200020022004200620082010Year

Successful

Challenged

Failed$0.0$0.4$0.7$1.1$1.4$1.8200220032004200520062007200820092010

Trillions (US Dollars)

Expenditures

Failed InvestmentsRequirements Defects & Waste7Sheldon, F. T. et al. (1992). Reliability measurement: From theory to practice. IEEE Software, 9(4), 13-20Johnson, J. (2002). ROI: It's your job. Extreme Programming 2002 Conference, Alghero, Sardinia, Italy.Requirements defects are #1 reason projects failTraditional projects specify too many requirementsMore than 65% of requirements are never used at allOther 7% Requirements47%Design28%Implementation18%DefectsAlways 7%Often 13%Sometimes16%Rarely19%Never45%WasteWhat is Agility?A-gil-i-ty (-'ji-l-t) Property consisting of quickness, lightness, and ease of movement; To be very nimbleThe ability to create and respond to change in order to profit in a turbulent global business environmentThe ability to quickly reprioritize use of resources when requirements, technology, and knowledge shiftA very fast response to sudden market changes and emerging threats by intensive customer interactionUse of evolutionary, incremental, and iterative delivery to converge on an optimal customer solutionMaximizing BUSINESS VALUE with right sized, just-enough, and just-in-time processes and documentationHighsmith, J. A. (2002). Agile software development ecosystems. Boston, MA: Addison-Wesley.8FEWhat are Agile Methods?9People-centric way to create innovative solutionsProduct-centric alternative to documents/processMarket-centric model to maximize business valueAgile Manifesto. (2001). Manifesto for agile software development. Retrieved September 3, 2008, from http://www.agilemanifesto.orgCustomer CollaborationWorking SoftwareIndividuals & Interactions Responding to Changevaluedmore thanvaluedmore thanvaluedmore thanvaluedmore thanContractsDocumentationProcessesProject PlansFrequent comm.Close proximityRegular meetingsMultiple comm. channelsFrequent feedbackRelationship strengthLeadershipBoundariesEmpowermentCompetenceStructureManageability/MotivationClear objectivesSmall/feasible scopeAcceptance criteriaTimeboxed iterationsValid operational resultsRegular cadence/intervalsOrg. flexibilityMgt. flexibilityProcess flexibilitySystem flexibilityTechnology flexibilityInfrastructure flexibilityContract complianceContract deliverablesContract change ordersLifecycle complianceProcess Maturity LevelRegulatory complianceDocument deliveriesDocument commentsDocument complianceCost ComplianceScope ComplianceSchedule ComplianceFFFFHow Do Agile Methods Work?Agile methods DONT mean deliver it now & fix it laterLightweight, yet disciplined approach to developmentReduced cost, risk, & waste while improving quality10Rico, D. F. (2012). Whats really happening in agile methods: Its principles revisited? Retrieved June 6, 2012, from http://davidfrico.com/agile-principles.pdfWhatHowResultFlexibilityUse lightweight, yet disciplined processes and artifactsLow work-in-processCustomerInvolve customers early and often throughout developmentEarly feedbackPrioritizeIdentify highest-priority, value-adding business needsFocus resourcesDescopeDescope complex programs by an order of magnitudeSimplify problemDecomposeDivide the remaining scope into smaller batchesManageable piecesIterateImplement pieces one at a time over long periods of timeDiffuse riskLeannessArchitect and design the system one iteration at a timeJIT waste-free designSwarmImplement each component in small cross-functional teamsKnowledge transferCollaborateUse frequent informal communications as often as possibleEfficient data transferTest EarlyIncrementally test each component as it is developedEarly verificationTest OftenPerform system-level regression testing every few minutesEarly validationAdaptFrequently identify optimal process and product solutionsImprove performanceAgile World ViewAgility has many dimensions other than ITIt ranges from leadership to technological agilityThe focus of this brief is program management agilityFEAgile LeadersAgile Organization ChangeAgile Acquisition & ContractingAgile Strategic PlanningAgile Capability AnalysisAgile Program ManagementAgile Tech.Agile Information SystemsAgile ToolsAgile Processes & Practices Agile Systems DevelopmentAgile Project Management11Agile Enterprise Delivery ModelLeffingwell, D. (2011). Agile software requirements: Lean requirements practices for teams, programs, and the enterprise. Boston, MA: Pearson Education.Begins with a high-level product vision/architectureContinues with needs development/release planningIncludes agile delivery teams to realize business value12

Agile MethodsHouse, D. (2012). Sixth annual state of agile survey: State of agile development. Atlanta, GA: VersionOne.VersionOne found 80% using agile methods todayMost are using Scrum with several key XP practicesNumber of CSMs have doubled to 200,000 in 2 years13

EAgile PracticesHouse, D. (2012). Sixth annual state of agile survey: State of agile development. Atlanta, GA: VersionOne.VersionOne found 65% using Scrum practices55% are using some of top XP technical practicesLean-Kanban is a rising practice with a 24% adoption14

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Studies of Agile MethodsDozens of surveys of agile methods since 2003100s of Agile and CMMI case studies documentedAgile productivity, quality, and cost better than CMMI15Rico, D. F. (2008). What is the return-on-investment of agile methods? Retrieved February 3, 2009, from http://davidfrico.com/rico08a.pdfRico, D. F. (2008). What is the ROI of agile vs. traditional methods? TickIT International, 10(4), 9-18.

Agile Cost of Quality (CoQ)Agile testing is 10x better than code inspectionsAgile testing is 100x better than traditional testingAgile testing is done earlier and 1,000x more often16Rico, D. F. (2012). The Cost of Quality (CoQ) for Agile vs. Traditional Project Management. Fairfax, VA: Gantthead.Com.Agile Cost & Benefit AnalysisCosts based on avg. productivity and qualityProductivity ranged from 4.7 to 5.9 LOC an hourCosts were $588,202 and benefits were $3,930,63117Rico, D. F., Sayani, H. H., & Sone, S. (2009). The business value of agile software methods: Maximizing ROI with just-in-time processes and documentation. Ft. Lauderdale, FL: J. Ross Publishing.d1 = [ln(Benefits Costs) + (Rate + 0.5 Risk2) Years] Risk Years, d2 = d1 Risk Years

Benefits of Agile MethodsAnalysis of 23 agile vs. 7,500 traditional projectsAgile projects are 54% better than traditional onesAgile has lower costs (61%) and fewer defects (93%)Mah, M. (2008). Measuring agile in the enterprise: Proceedings of the Agile 2008 Conference, Toronto, Canada.Project Cost in Millions $ 0.751.502.253.002.81.1Before AgileAfter Agile61%LowerCostTotal Staffing1811Before AgileAfter Agile39%LessStaff5101520Delivery Time in Months51015201813.5Before AgileAfter Agile24%FasterCumulative Defects6251250187525002270381Before AgileAfter Agile93%LessDefects18EEFFAgile vs. Traditional SuccessTraditional projects succeed at 50% industry avg.Traditional projects are challenged 20% more oftenAgile projects succeed 3x more and fail 3x less oftenStandish Group. (2012). Chaos manifesto. Boston, MA: Author.19AgileTraditionalSuccess42%Failed9%Challenged49%Success14%Failed29%Challenged57%NetworkComputerOperating SystemMiddlewareApplicationsAPIsGUIAgile vs. Traditional OutcomesAgile requirements implemented in slices vs. layersUser needs with higher business value are done firstReduces cost & risk while increasing business success20Shore, J. (2011). Evolutionary design illustrated. Norwegian Developers Conference, Oslo, Norway.AgileTraditional123 Faster Early ROI Lower Costs Fewer Defects Manageable Risk Better Performance Smaller Attack Surface Late No Value Cost Overruns Very Poor Quality Uncontrollable Risk Slowest Performance More Security Incidents Seven WastesReworkMotionWaitingInventoryTransportationOverprocessingOverproductionMINIMIZESMAXIMIZESJIT, Just-enough architectureEarly, in-process system V&VFast continuous improvementScalable to systems of systemsMaximizes successful outcomesMyth of perfect architectureLate big-bang integration testsYear long improvement cyclesBreaks down on large projectsUndermines business successHoque, F., et al. (2007). Business technology convergence. The role of business technology convergence in innovation and adaptability and its effect on financial performance. Stamford, CT: BTM Institute.21Study of 15 agile vs. non-agile Fortune 500 firmsBased on models to measure organizational agilityAgile firms out perform non agile firms by up to 36%Benefits of Organizational Agility

Agile Industry Case Studies80% of worldwide IT projects use agile methodsIncludes regulated industries, i.e., DoD, FDA, etc.Agile now used for safety critical systems, FBI, etc.22IndustryShrinkWrappedElectronicCommerceHealthCareLawEnforcementOrg20 teams140 people5 countriesSize15 teams90 peopleCollocated4 teams20 peopleCollocated10 teams50 peopleCollocated3 teams12 peopleCollocatedU.S.DoDPrimaveraGoogleStratcomFBIFDAProjectPrimaveraAdwordsSKIwebSentinelm2000PurposeProjectManagementAdvertisingKnowledgeManagementCase FileWorkflowBloodAnalysis1,838 User Stories6,250 Function Points500,000 Lines of CodeMetrics26,809 User Stories91,146 Function Points7,291,666 Lines of Code1,659 User Stories5,640 Function Points451,235 Lines of Code3,947 User Stories13,419 Function Points1,073,529 Lines of Code390 User Stories1,324 Function Points105,958 Lines of CodeRico, D. F. (2010). Lean and agile project management: For large programs and projects. Proceedings of the First International Conference on Lean Enterprise Software and Systems, Helsinki, Finland, 37-43.FFFEEEPerceptions of Agile MethodsStructure, reward, decision, staffing, leadership, etc.Top-down, individualism, regulation, compliance, etc.Focus on reforming acquisition & procurement system23Type/KindCommon DoD Agile PerceptionsDisciplineReality with Respect to Agile MethodsScalabilityDomainManagementRequirementsArchitectureQualityInspectionsSecurityUndisciplined Cowboy CodingOnly Applies Small ProjectsOnly for Protoperational SystemsFlexible Scope/Can't Use EVMDoesn't Use RequirementsSpaghetti Code from IterationsNo Documents/UnmaintainableHigh CoQ from No InspectionsVulnerabilities from HackingRigorous process, plans, requirements, QA, CM, testing, documents etc.Used by 100, 500, 1,000, 10,000+ person person projects & organizationsUsed in DoD, medical devices, avionics, autos, electronics, etc.Lightweight EVM model is used with its release planning methodologyAlways begins with valuable, well-defined, & prioritized requirementsBegins with lean architecture or create waste-free emergent designElectronic plans, requirements, designs, tests, manuals, documents, etc.One or two orders of magnitude more inspections & tests performedSecurity practices result in smaller attack surface & fewer vulnerabilitiesRico, D. F., Sayani, H. H., & Sone, S. (2009). The business value of agile software methods: Maximizing ROI with just-in-time processes and documentation. Ft. Lauderdale, FL: J. Ross Publishing.FFFFFFEEConclusion24Agility is the evolution of management thoughtConfluence of traditional and non-traditional ideasImprove performance by over an order of magnitudeThe world of traditional methods belongs to yesterdayDont waste your time using traditional methods on 21st century projectsAgile methods are Systems development approachesNew product development approachesExpertly designed to be fast and efficientIntentionally lean and free of waste (muda) Systematic highly-disciplined approachesCapable of producing high quality systemsRight-sized, just-enough, and just-in-time toolsScalable to large, complex mission-critical systemsDesigned to maximize business value for customersWysocki, R.F. (2010). Adaptive project framework: Managing complexity in the face of uncertainty. Boston, MA: Pearson Education.FE

Books on ROI of SW MethodsGuides to software methods for business leadersCommunicates business value of software methodsRosetta stones to unlocking ROI of software methods

http://davidfrico.com/agile-book.htm (Description)http://davidfrico.com/roi-book.htm (Description)25Costs

Benefits

B/CR

ROI

NPV

BEP

ROA

$588,202

$3,930,631

7:1

567%

$2,806,654

$88,220

$3,504,292

Metric

Formula

Trad. Testing

(10,000 5.4436 + 3.945 10 100) 100

(

(10,000 10.51 6,666.67 9) 100 $588,202

$3,930,631 $588,202

($3,930,631 $588,202) $588,202 100%

($3,930,631 5) 1.055) $588,202

$588,202 ($4,509,997 $588,202 1)

NORMSDIST(2.24) $3,930,631 NORMSDIST(0.85) $588,202 EXP(5% 5)

Agile Testing

$233,152

18:1

1,734%

$3,469,140

$12,710

$4,098,159

$4,275,681