Agile and the value based prioritization
Agile and the value based prioritization
Value based prioritization is based on :
– Compliance
– Customer valued prioritization
– ROI
– IRR
– PV
– NPV
– IRR and NPV
– Minimum marketable feature (MMF)
– Relative prioritization/ranking
– Value
Compliance
Compliance is the act of being in alignment with guidelines, regulations and/or legislation.
Customer valued prioritization
Customer-value prioritization is a method for relative prioritization of product features based on customer-value for ordering the product backlog. When ordering the product backlog, it is also important to consider other aspects (e.g., associated risk, dependencies, etc.,) of features. [The Art of Agile Development. James Shore.]
ROI
Return on Investment (ROI): A metric used to evaluate the efficiency of an investment or to compare efficiency among a number of investments. To calculate ROI, the return of an investment (i.e., the gain minus the cost) is divided by the cost of the investment. The result is usually expressed as a percentage and sometimes a ratio. The product owner is often said to be responsible for the ROI. [Agile Estimating and Planning. Mike Cohn.]
Select project with biggest ROI.
ROI = (Benefit – Cost)/Cost
One of the key responsibilities of the product owner is the return on investment
IRR
The internal rate of return (IRR) is a financial metric used to measure and compare the profitability of investments. The IRR is the « rate » that makes the net present value of all cash flows from a particular investment equal to zero. Unlike NPV which is a dollar amount (i.e., a magnitude) value, the IRR is a rate (i.e., a percentage). Often times, the IRR is compared against a threshold rate value to determine if the investment is a suitable risk worth implementing. For example, you might calculate an IRR to be 13% for an investment while a comparative market rate is 2%. The IRR being larger than the comparative market rate, would indicate the investment is worth pursuing. [Agile Estimating and Planning. Mike Cohn.]
Select project with biggest IRR
PV
Present value
PV = Future Value / (1 + I)^n where I is the interest rate and n is the number of periods
NPV
Net present value (NPV)
Net Present Value: A metric used to analyze the profitability of an investment or project. NPV is the difference between the present value of cash inflows and the present value of cash outflows. NPV considers the likelihood of future cash inflows that an investment or project will yield. NPV is the sum of each cash inflow/outflow for the expected duration of the investment. Each cash inflow/outflow is discounted back to its present value (PV) (i.e.,, what the money is worth in terms of today’s value). NPV is the sum of all terms: NPV = Sum of [ Rt/(1 + i)^t ] where t = the time of the cash flow, i = the discount rate (the rate of return that could be earned on in the financial markets), and Rt = the net cash inflow or outflow. For example, consider the following two year period. The discount rate is 5% and the initial investment cost is $500. At the end of the first year, a $200 inflow is expected. At the end of the second year, a $1,000 is expected. NPV = – 500 + 200/(1.05)^1 + 1000/(1.05)^2 = ∼$597. If NPV is positive, it indicates that the investment will add value to the buyer’s portfolio. If NPV is negative, it will subtract value. If NPV is zero, it will neither add or subtract value. [Agile Estimating and Planning. Mike Cohn.]
Select project with biggest NPV
IRR and NPV
The internal rate of return (IRR) is a financial metric used to measure and compare the profitability of investments. The IRR is the « rate » that makes the net present value of all cash flows from a particular investment equal to zero. Unlike NPV which is a dollar amount (i.e., a magnitude) value, the IRR is a rate (i.e.,, a percentage). Often times, the IRR is compared against a threshold rate value to determine if the investment is a suitable risk worth implementing. For example, you might calculate an IRR to be 13% for an investment while a comparative market rate is 2%. The IRR being larger than the comparative market rate, would indicate the investment is worth pursuing. [Agile Estimating and Planning. Mike Cohn.]
NPV = 0 when NPV finding the IRR.
Minimum marketable feature (MMF)
A Minimal Marketable Feature (MMF) is a software feature or product feature that is both minimal and marketable. ‘Minimal’ taking the meaning of simple and small or not complex. ‘Marketable’ taking the meaning of having some value, whether it is revenue generating or cost saving, that can be marketed or sold. [The Art of Agile Development. James Shore.]
Relative prioritization/ranking
Relative ranking/prioritization involves ordering a list of items (e.g., user stories, epics, tasks, defects, etc.,) based on a team-defined definition of priority. [The Art of Agile Development. James Shore.]
Value, cost, and risk are key elements to consider when prioritizing user stories. [Agile Estimating and Planning. Mike Cohn.]
Value
– Pareto
The pareto rule stipulates that 80% of value derives from 20% of the work. [Lean-Agile Software Development: Achieving Enterprise Agility. Alan Shalloway, Guy Beaver, James R. Trott.]
– Backlog
The product backlog helps both the team and the product owner understand the priorities required to deliver business value.
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