Agile and the value based prioritization

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) is 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.
  • ROI = (Benefit – Cost)/Cost
  • The result is usually expressed as a percentage and sometimes a ratio.
  • The Product Owner is often said to be responsible for the ROI.
    • One of the key responsibilities of the Product Owner is the return on investment.
  • [Agile Estimating and Planning. Mike Cohn.]
• Select project with biggest ROI.

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) is 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

• 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.]

IRR and NPV

• 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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