The Business Case for Agile: What Every Executive Needs to Know

The Business Case for Agile

Seattle Scrum Gathering

Copyright © 2011 SolutionsIQ. All rights reserved.

Audience Introduction


Speaker Introduction: John Rudd

• Co-owner and Managing Director of SolutionsIQ
• Lead Principal at a financial consulting and restructuring firm
• Lead Principal at an investment banking firm
• Specialized in operational & financial restructurings, mergers
& acquisitions, and interim management
• Filled multiple interim executive roles including CEO,
president, CFO, and chief restructuring officer
• Worked as CFO of a West Coast oil company and a
commodity lender for ING
• Received his B.S. in Economics from the University of
Minnesota and his MBA from the University of Southern
California


A Business Case for Agile: Agenda

1. Financial management in an increasingly
uncertain world
2. The use of Real Options
3. Real Options applied to portfolio
management
4. Quantifying the benefits
5. Putting it all together


Financial Management in an increasingly
uncertain world

5/20/2011 5

New Technology Adoption

Number of Years for New Technology to be
Adopted by 25% of US Households
30

25

20

15

10 # of Years

5

0


Computer processing (Moore’s Law)

Transistors
1,600,000,000

1,400,000,000

1,200,000,000

1,000,000,000

800,000,000
Transistors

600,000,000

400,000,000

200,000,000

0
1970 1972 1974 1978 1982 1984 1989 1993 1996 1999 2000 2003 2004 2007


Adoption rates: Facebook & Twitter

Facebook Active Users Twitter Number of
(per million) Unique Visitors
700 30,000,000

600
25,000,000

500
20,000,000

400
15,000,000 # of Monthly
Active Users
300 Visitors

10,000,000
200

5,000,000
100

0 0
2004 2005 2006 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011


Technology change is accelerating

Rate of Technology Change from
1950-2011

1950 2011


Product lifecycles are getting shorter and
shorter
Rate of Technology Change vs. Product
Lifecycle

1950 2011


The near term is more & more
uncertain

• Fewer constants, more variables, more
choices
• Horizon of predictable future decreasing
• Market change is outpacing our ability to
adequately estimate likely outcomes


As project uncertainty increases, expected
return reduces

|--------------------||--------------------------------------------------------------------------|
Investment Expected Return

|--------------------||--------------------------------------------------------|
Investment Return horizon shrinking

|-----------|  |-------------------------------|
Investment Expected Return


But we can’t always reduce our
investment to match the reduced
return

• As our confidence in the length of return
decreases, expected return decreases
• We are converging on the point where we
are unable to reduce the investment to a size
that would provide an adequate return


Snapshot from 1971
Rate of Technology Change vs.
Product Lifecycle

1950 1971 1974 2011


The good old days

With a slower pace of technological change, project
returns were more certain

Expected Return
Horizon

1971 1972 1973 1974


Project business case

• Quantifiable market opportunity
• Estimated cost of investment
• Program governance & control
• Harvest the return over multiple years


The good old days: Midwest
asphalt distributor

• 1960s mini-empire
• Largely rural areas
• Time capsule


Snapshot from 2001
Rate of Technology Change vs. Product
Lifecycle

1950 1998 2001 2011


Mounting uncertainty

As the change curve increases, certainty of project return
decreases

Expected Return
Horizon

1998 1999 2000 2001


Mounting uncertainty: Lighting
manufacturer

• Domestic manufacturing
• Move to Mexico
• The industry moved to China


From the known(able) to the unknowable

• Projects are undertaken to provide a solution
to address an anticipated future market need
• Ability to aggregate enough information to
“prove” the business case is becoming
impossible
• We are moving from rational decision-
making to…what?


So what can be done?

• Do US corps know how to invest in uncertain
times?
• Corporations now holding more cash than they
have since the 1950s


The Acme Payphone Component
company
Business Situation Bet the farm project
• $10 million capital budget • Credit card interface
• Industry experiencing good • Replace the need for
growth change
• Projected unit growth • Replace phone cards
excellent • Three year project
• Where is the market going: • Percent of capital budget:
– Limited local calls 100%
– Heavy reliance on phone
• Likelihood of success:
cards
“can’t miss!”
– Need a competitive
advantage

Where did Acme go wrong?

They bet on a “sure-fire” winner at the expense of all
other options in a market changing faster than their
ability to know
# of Payphones (per million)
3.0

2.5

2.0

1.5

1.0

0.5

0.0
1998 1999 2000 2003 2006 2007


Acme Retrospective

• Was there adequate information to
determine future market need?
• Was the investment estimate accurate?
• Was the program managed properly?
• Did the market demand meet expectations at
the time of delivery?


Real Options


Options

• Financial Option: Gives the buyer the right,
but not the obligation, to buy or sell an asset
at a set price on or before a given date.
• Real Option: an option that a business gains
by undertaking a certain investment.
– In other words, an exploratory or limited
investment a company makes to confirm the
upside of a further investment.


Real Options: an investment in
knowledge

• Investing just enough to confirm an
assumption
• When a variable becomes a constant, overall
project uncertainty is reduced
• This minimizes sunk costs and maximizes
successful outcomes


Blockbuster

• Traditional retail model
• Old Netflix model
• Redbox model
• Streaming
• Next technology?
• What happened to the brand?


Real Options – decision tree
Assumption
#3

Yes
Assumption
#2

No
Yes
Assumption
#1

No STOP

STOP


Regressive Life Insurance

Situation Some of the Risks

• Exclusively work through • No technological expertise
broker network • No internet expertise
• Target customer 50 to 70 • Flight risk of broker
years old network
• Losing market share rapidly • Channel confusion
– they believe to internet • Solution not accepted in
sales the marketplace
• Are looking at a 12 month
project to have a full
service web-based
distribution model

Exploring how to proceed

Big Bang Release Real Options Approach
• Go/No-go upfront • Incremental investments to
• Allocate budget obtain “knowledge bites”
• Specify requirements • Based on findings refine
• Implement solution and validate further
investment
• Continue process as long as
there is sufficient business
value


Regressive’s Real Options decision
tree
Release: 1st
tier approval
& physical
Release: scheduling
online
application
Will brokers
support the
initiative?
Is a 3rd
party
platform
viable?


Isn’t this just good management?

The big bang release has problems
• Allocation of capital is upfront and based on
limited information
• Once capital is allocated, the business case
decision is incontestable
– Governance dictates that program management cannot
change project charter
– No communication channel to revise executive decision
– Project sequestered from changes in the market


Protecting senior management
from themselves

• Kneejerk change in corporate vision
• Bold CEO proclamation dominates corporate
planning
• Everyone but senior management knows the
outcome will fail


Real Options summarized

• Take steps to increase
knowledge and stop early
if assumptions are proven
false
• Invest incrementally as
assumptions are
confirmed
• Reallocate capital based
on new knowledge


Real Options applied to portfolio
management


Traditional Project Portfolio

• Fewer Investments
• Limited control within period
• Can’t offset costs with returns
• Can’t measure portfolio return

Traditional Portfolio Implications

Characteristics Results Problems
Larger projects Fewer projects Less diversification
Longer projects Span annual Reduced portfolio
budget cycles options
Serial approach Value only at end Few real options and
of project limited ability to
change


Applying Real Options to the portfolio

• Understand the market
• Break projects into a series
of options
• Reallocate investment
• Increase/Delay/Stop

Capital allocation : past & future

Past Future

Investment Investment

Big Bang Option Based
Big Bang Option Based


Maximize portfolio return

 Increased diversification
 Ability to monitor and manage performance
within the budget cycle
 Ability to redirect funds from losers to
winners
 Optimize portfolio within the budget cycle


Multiple bets and reallocating funds to
winners


Quantifying the Benefits


Baseline Business Case

Regressive Insurance Amount
Project Profile
Investment (budget) $4,800,000
Effort Duration (months) 12
Operating Cost / Month $400,000
% Value at Release 100%
Expected Monthly Income $200,000
Ongoing Monthly Support $50,000

45

Baseline Business Case

Regressive Insurance Amount
Project Profile
Capital Budget $4,800,000
Net Monthly Cash Flow $150,000
(after release)
IRR (Five Years) 18.5%
Internal IRR Threshold 15%

46

Baseline monthly cash flow
200,000

100,000

-
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59

(100,000)

(200,000)

(300,000)

(400,000)

(500,000)

5/20/2011 47

Project payback period: month 43
3,000,000.00

2,000,000.00

Breakeven
1,000,000.00

Return
-
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59

(1,000,000.00)

(2,000,000.00)
Investment
(3,000,000.00)

(4,000,000.00)

(5,000,000.00)

Peak
(6,000,000.00)


Baseline capital budget = cash budget
= write off risk
$5,000,000

$4,500,000

$4,000,000

$3,500,000

$3,000,000

$2,500,000

$2,000,000

$1,500,000

$1,000,000

$500,000

$-
Capital Expense Budget Allocation Write Off Risk


The Real Options approach

• Break the project into a series of smaller go/no-go
decisions (in this case monthly), using the project
team’s input and market input
• Determine quickest path to market and continue the
go/no-go process with subsequent releases
• After getting to market with the initial minimum
feature set, prioritize subsequent features based on
highest business value


Prioritizing features by value reduces the
value of the subsequent releases
30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
R1 R2 R3 R4 R5 R6 R7 R8 R9 R10


After three months, cash receipts
reduce overall cash investment
$200,000

$100,000

$-
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59

$(100,000)

$(200,000)

$(300,000)

$(400,000)

$(500,000)


Cash investment is reduced and
breakeven is reached at month 37
$4,000,000

$3,000,000

$2,000,000

Breakeven
$1,000,000
Return
$-
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
Agile
$(1,000,000)
Investment Waterfall

$(2,000,000)

$(3,000,000)

$(4,000,000)

Peak
$(5,000,000)

$(6,000,000)


Like the baseline project, the capital
expenditure is $4,800,000
$6,000,000

$5,000,000

$4,000,000

$3,000,000

$2,000,000

$1,000,000

$-
Waterfall R1 R2 R3 R4 R5 R6 R7 R8 R9 R10


However, the cash investment is offset by
income from early releases
$6,000,000

$5,000,000

$4,000,000

$3,000,000

$2,000,000

$1,000,000

$-


Write-off risk is capped after the first
release
Write Off Risk
$5,000,000

$4,500,000

$4,000,000

$3,500,000

$3,000,000

$2,500,000

$2,000,000

$1,500,000

$1,000,000

$500,000

$-


The capital expense is the same, but cash
requirements and overall risk are reduced
$6,000,000

$5,000,000

$4,000,000

Captial Budget
$3,000,000
Cash Budget
Write-Off Risk

$2,000,000

$1,000,000

$-


Internal rate of return increases
from 18.5% to 30.3%
35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
Waterfall Agile

5/20/2011 58

Prioritizing features by value, reduces
the value of subsequent releases
30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
R1 R2 R3 R4 R5 R6 R7 R8 R9 R10


The first few releases have impressive
returns…
250.0%

200.0%

150.0%

100.0%

50.0%

15% Hurdle Rate
0.0%

-50.0%


…but as lower value items are released, return
diminishes below the hurdle rate
250.0%

200.0%

150.0%

100.0%

50.0%

15% Hurdle Rate
0.0%

-50.0%


By dropping the last three iterations,
project return and risk profile improves
$6,000,000

$5,000,000

$4,000,000

Capital
$3,000,000
Cash
Write-Off

$2,000,000

$1,000,000

$-


Investment is reduced and dollar
return increases
$4,000,000

$3,000,000

$2,000,000
Breakeven
$1,000,000
Return
$-
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 Waterfall
$(1,000,000) Agile
Investment Agile Modified
$(2,000,000)

$(3,000,000)

$(4,000,000) Peak
$(5,000,000)

$(6,000,000)

5/20/2011 63

By removing lower value features,
IRR is further improved
60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
Waterfall Agile Agile Reduced Scope

5/20/2011 64

How much more financial value can Agile
and Real Options deliver?
• Capital expense was reduced by 33%
• Cash budget was reduced by 41%
• Dollar risk was reduced by 75%
• Overall return increased by 274%
Project Comparison Waterfall Agile Delta % Delta
Capital Expense $4,800,000 $3,200,000 ($1,600,000) -33%

Cash Budget $4,800,000 $2,811,500 ($1,988,500) -41%

Write-Off Risk $4,800,000 $1,200,000 ($3,600,000) -75%

Project Length (months) 12 8 (4) -33%

Expected Project IRR 18.5% 50.5% 32.5% 274%


How is the portfolio improved?
• Less capital tied up means more investments
and increased diversification
• Early release improves corporate profits and
allows for increased capital expenditure
• By committing capital incrementally, multiple
projects can be taken on simultaneously
• The go/no-go decision now includes: could
capital be better deployed in the portfolio?


All this before we consider the value of
lean waste reduction

Some Types of Waste Examples
Inventory •Fully completed functional spec ages
•Much not used until late or not at all
Process Waste •Big, complicated project plan to update
•Building a phonebook-sized functional spec
•Upfront estimates on detailed task work
breakdowns that will be updated or ignored
•Bugs not found in timely fashion increases cost
Estimation Buffers •Margin of error buffers added by each function
Waiting •Testers waiting for developers to complete their
tasks & vice versa
Gold Plating •Overbuilding specifications


Putting it all together


Range of uncertainty

Unknowable
Irrational

Zone of Available
competition Information
Rational

Well Known


Traditional business case

Executive
Biz case?
Yes
$$$$$$$
$$$$$$$

No
Assumption: black or white
decision to allocate capital

Traditional approach

Executive
$$$$$$
$$$$$$

Business case is a go



Executive PMO
$$$$$$ $$$$$$
$$$$$$ $$$$$$

• Capital is allocated
• PMO enforces charter
• No power to change it



Executive PMO Project
$$$$$$ $$$$$$
$$$$$$ $$$$$$

Project expense budget is
approved



$$$$$$
$$ $$$$$$
$$
$$$$$$
$$ $$$$$$
$$

PMO makes sure the money
is properly spent



$$$$$$
$$$ $$$$$$
$$$
$$$$$$
$$$ $$$$$$
$$$

All of it



$$$$$$
$$$$$ $$$$$$
$$$$$
$$$$$$
$$$$$ $$$$$$
$$$$$

All of it



$$$$$$ $$$$$$
$$$$$$ $$$$$$

All of it



$$$$$$ $$$$$$
$$$$$$ $$$$$$

Year 1
$$$$$$
$$
Partial recovery $$$$$$
$$
after first year



$$$$$$ $$$$$$
$$$$$$ $$$$$$

Year 2 Year 1
$$$$$$
$$$ $$$$$$
$$
$$$$$$
$$$ $$$$$$
$$



$$$$$$ $$$$$$
$$$$$$ $$$$$$

Breakeven Year 2 Year 1
$$$$$$ $$$$$$
$$$ $$$$$$
$$
$$$$$$ $$$$$$
$$$ $$$$$$
$$


New plant installation: 1965
Highly certain
business case Low Risk Profile
decision
Good
Idea Scope
=
Time Budget

Black & white decision

ERP installation 1998
Less certain
business case Riskier Profile
decision
Good
Scope
= Idea

Time Budget

Uncertain software scope

Less certain
decision
Good
Idea Scope

= Time Budget

Jeopardizes entire project

Less certain
decision
Good
Idea Scope

= Time Budget

Agile to the rescue

Agile project management

Executive
$$$$$$
$$$$$$

Business case is a go



Executive PMO
$$$$$$ $$$$$$
$$$$$$ $$$$$$

• Capital is allocated
• PMO enforces charter
• No power to change it



Executive PMO Agile Proj
$$$$$$ $$$$$$
$$$$$$ $$$$$$

• Project expense budget is
approved
• Up to this point no change



Executive PMO Agile
$$$$$
$$ $$$$$
$$ Sprint 6
$$$$$
$$ $$$$$
$$
$$$$$$
$
$$$$$$
$

Business
Product
Owner
Release 1

What’s wrong with this $$$$$$
$$
$$$$$$
$$
picture?



Executive PMO Agile
$$$
$$$$$ $$$$$
$$$ Sprint 12
$$
$$$$$ $$$$$
$$
$$$$$$$
$$$$$$$

Business
Product
Owner
Release 2 Release 1
$$$
$$$$ $$
$$
$$$$ $$



Executive PMO Agile
$$$$$ $$$$$ Sprint 12
$$$$$ $$$$$
$$$$$$$
$$$$$$$

Business
Product
Owner
Release N Release 2 Release 1
$$$$ $$$
$$$$ $$
$$$$ $$
$$$$ $$


Agile project management scorecard



• Scope risk reduced



• Schedule risk reduced



• Expense budget risk reduced



• Expense budget reduced

What about
business concept?



• If software is not released
early, business concept
remains untested



• If software is released early,
Agile project management still
may not help, if it’s a bad
idea…



• If software is released early,
Agile project management still
may not help, if it’s a bad
idea…

…and there is no
way to stop or
slow investment


Capital project 2012
Inescapable uncertainty
in business case Risky Profile
decision
Good
Scope
Idea
= Time Budget

Agile project management is not enough

Traditional investment

Executive PMO Agile
$$$$$ $$$$$ Sprint 3
$$$$$ $$$$$
$$$$$$$
$$$$$$$

Business
Product
Owner
Release 1
$$
$$

One way communication


Agile investment

Executive PMO Agile
$$$$$ $$$$$ Sprint 3
$$$$$ $$$$$
$$$$$$$
$$$$$$$

Business
Product
Owner
Release 1
$$
$$

Feedback to control
investment

Agile Real Options business case

Uncertainty threshold

Opt 1
Executive
$$$$$$
$$$$$$




Opt 1
Executive
$
$$$$$$
$
$$$$$$




Opt 2
Opt 1
Executive $
$ $
$$$$$$
$
$$$$$$
$



Opt 3
Opt 2 $$
Opt 1 $
Executive $
$ $
$$$$$$
$$
$$$$$$
$



Bingo!

Opt 3
Opt 2 $$
Opt 1 $
Executive $
$ $
$$$$$$
$$
$$$$$$
$


Business case for each release

Executive PMO Agile
$$$$$ $$$$$ Sprint 12
$$$$$ $$$$$
$$$$$$$
$$$$$$$

Business Market feedback Release 1
Case for
$$
Release 2
$$

No

Agile Real Options Summary

• We have reached an inflection point: business case
assumptions are not knowable prior to beginning a
traditional investment
• Agile Real Options helps us navigate the unknown
through incremental investments that increase our
knowledge over the life of the investment
• Applying Agile Real Options to the portfolio,
diversifies risk and enhances return
• To fully exploit the Agile opportunity, executives
should make incremental business cases validated
by market & program management feedback

Questions?


The Business Case for Agile: What Every Executive Needs to Know

Empfohlen

Empfohlen

Weitere ähnliche Inhalte

Andere mochten auch

Andere mochten auch (17)

Ähnlich wie The Business Case for Agile: What Every Executive Needs to Know

Ähnlich wie The Business Case for Agile: What Every Executive Needs to Know (20)

Kürzlich hochgeladen

Kürzlich hochgeladen (20)

The Business Case for Agile: What Every Executive Needs to Know