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Prepared By:

Gervais Johnson

601 Montgomery St, Suite 650, San Francisco, CA 94111 | 415-678-1350 | www.MatrixRes.com

Impavid Agile

Measuring Business Value

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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

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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

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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

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Financial Business Value Measures

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Agile Economics

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• 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

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Agile – Lean Business Value Economics

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Agile Improving Business Economics

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Agile Improving Business Economics

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Agile Breaking Results Expectations

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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

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Agile Improving Business Health

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Cost of Change $

Analysis Design Code Test Install Maintenance

Project Life Cycle

Traditional

Agile

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Agile Lowers Cost of Change

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Business Value Understanding

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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

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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

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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

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Val

ue

(%)

10 20 30 40 50 60 70

Time, Cost, Features (%)

80 90 100

200

180

160

140

120

100

80

60

40

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Business Value Prioritization

Scrum Inc Way

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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

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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

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[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]

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2 [Profit] = [Monthly Users] x [Member Fee] – [Fixed Cost]

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Production Function Business Value

Scrum Inc Way

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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

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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

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Time (t)-‐$50

$20

NPV Business Value

Scrum Inc Way

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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

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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

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• 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

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• 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

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• 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

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Analysis TestsCodingDesign Deploy

AnalysisDesignCodingTests

Deploy

Spri

nt

0

AnalysisDesignCodingTests

Deploy

AnalysisDesignCodingTests

Deploy

AnalysisDesignCodingTests

Deploy

AnalysisDesignCodingTests

Deploy

Maint

Agile Capitalization Improves Financial

Statement

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• 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

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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

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• 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

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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

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• 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

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• 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

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• 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

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• 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

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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

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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)

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• 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

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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!

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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

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Starting is Easy

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Steve Farley, VP Application

Development Center,

Nationwide Insurance

Carmen DeArdo, Director,

Build Technology Leader,

Nationwide Insurance

© IBMCorporat

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Nationwide Insurance Case Study

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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

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GE and HISCOX Case Studies

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IBM Case Study

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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

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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

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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

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Spotify, SAP, and GM Examples

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Impavid Agile Future Topics for Discussion

Agile and Change Management

DevOps

Agile Transformation

Cynefin Framework

Executive Influence

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Open Forum

Discussion