This document provides an overview of measuring business value using agile methods. It begins with introductions of the presenter, Gervais Johnson, and his qualifications. The outline includes sections on business value, agile economics, defining business value, focusing areas for business value, and prioritizing features by business value. It discusses techniques for prioritizing business value like return on investment and net present value calculations. The document emphasizes linking business value determinations to a company's production function and financial metrics. It also addresses capitalizing agile software development costs appropriately between capital expenditures and operating expenses.

1. 1
Prepared By:
Gervais Johnson
601 Montgomery St, Suite 650, San Francisco, CA 94111 | 415-678-1350 | www.MatrixRes.com
Impavid Agile
Measuring Business Value

2. 2
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

3. 3
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

4. 4
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. 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

6. 6
Financial Business Value Measures

7. 7
Agile Economics

8. 8
• 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

9. 9
Agile – Lean Business Value Economics

10. 10
Agile Improving Business Economics

11. 11
Agile Improving Business Economics

12. 12
Agile Breaking Results Expectations

13. 13
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
Revenue
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

14. 14
Agile Improving Business Health

15. 15
Cost of
Change $
Analysis Design Code Test Install Maintenance
Project Life Cycle
Traditional
Agile
15
Agile Lowers Cost of Change

16. 16
Business Value Understanding

17. 17
©2013ScrumInc.
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

18. 18
©2013ScrumInc.
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

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©2013ScrumInc.
80% of
value
typically
resides in
20% of
features
65% of features provide little tono
value, 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 whichfeatures
add value and which don’t?
Business Value and Feature Alignment

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©2013ScrumInc.
Value(%)
10 20 30 40 50 60 70
Time, Cost, Features (%)
80 90 100
200
180
160
140
120
100
80
60
40
20
Business Value Prioritization

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©2013ScrumInc.
Bubble Sort
Planning Poker
Break-even analysis
Return On Investment
Cash Flow Analysis
Net Present Value
Faster
MoreDetailed
• 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 expected
incremental 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 the
revenues and expenses associated for a feature in
each 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

22. 22
©2013ScrumInc.
2. Regular Quarterly Cadence
Invoicing
IT, communications, andweb
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

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©2013ScrumInc.
[Profit] = [Units Sold] x ([Price/Unit] – [Cost/Unit]) – [Fixed Cost]
• Production Function describes the mechanics by which
organizaation accomplishes its mission
• NPV/point calculaations should link to variables in the
Production Function
• Agreeing on the Production Function helps align the product vision
Some Examples:
[Impact] = [People Impacted] x [Magnitude of Impact]
1
2 [Profit] = [Monthly Users] x [Member Fee] – [Fixed Cost]
3
Production Function Business Value

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©2013ScrumInc.
Maximum
Required
Investment
Cash flow
break even
point
Time
Point of
Positive Return
on Investment
CumulaEve
Cash Flow ($)
Investment period Return period
Cash Flow Business Value

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©2013ScrumInc.
Ct
Σ(1+r)t
t=0
N
Where
Ct is the net cash flow in time period t
r is the discount rate
t is the time period
N 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
15
Time (t)-‐$50
$20
NPV Business Value

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©2013ScrumInc.
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

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©2013ScrumInc.
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
E4
E5
E6
E7
E8
NPV/Points and Epics Prioritization

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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

29. 29
• 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

30. 30
• 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 CapEx
and 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
Analysis
Design
Coding
Tests
Deploy
Sprint0
Analysis
Design
Coding
Tests
Deploy
Analysis
Design
Coding
Tests
Deploy
Analysis
Design
Coding
Tests
Deploy
Analysis
Design
Coding
Tests
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 assets
can 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.” —Taiichi
Ohno
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

35. 35
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

36. 36
• 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 that
receive 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

37. 37
• 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

38. 38
• 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

39. 39
• 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

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40
https://less.works/less/framework/index.html
http://www.scaledagileacademy.com/
http://www.disciplinedagiledelivery.com/agility-at-scale/
Popular Agile Frameworks

41. 41
41
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

42. 42
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 deliver
value 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)

43. 43
• 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

44. 44
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 an
approach, a mindset – a combination of culture, process
and technology (including infrastructure, tools and
services).
3. Agile is not only about the hand-off between
Business and IT. Agile is about applying lean and
agile principles across the business organization
and application delivery lifecycle (biz-dev-test-
deploy- operate) to achieve continuous delivery of
digital innovation.
• Map your Delivery Pipeline to find the
bottlenecks!

45. 45
1
Get Mapped – Agile Adoption Transformation Roadmao
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
2
Build & Pilot
 Build / create the DevOps framework
 Address gaps between current state and end state
 Conduct pilots
3
Optimize & Expand
 Optimize framework
 Onboard next set of applications
 Continue to monitor and measure impact
Start Here
© IBM4
Starting is Easy

46. 46
Steve Farley, VP Application
Development Center,
Nationwide Insurance
Carmen DeArdo, Director,
Build Technology Leader,
Nationwide Insurance
© IBM4
Nationwide Insurance Case Study

47. 47
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.”
© IBM4
GE and HISCOX Case Studies

48. 48
IBM Case Study

49. 49
2015
2016+
2013
Roadmap &
Alignment
2013
Roadmap &
Alignment
Optimization
& Agility
Leverage
& Elevation
2014
Integration &
Standardization
ValueCapability&EnablementValueCapability&Enablement
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

50. 50
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

51. 51
51
Spotify, SAP, and GM Examples

52. 52
Impavid Agile Future Topics for Discussion
 Agile and Change Management
 DevOps
 Digital Enterprise and Culture

53. 53
Open Forum
Discussion