ROI calculation

As you explain, Business Value is very dependent on your own contexte.
It can also be time spare for your customers ; gain of market share ; image of the company on the market ; opportunity enabler...

So maybe we can help you, but nobody can calculate your ROI estimate.

ROI calculation is one of many conventional wisdoms that are challenged in agile practice. Agility requires a new understanding of value, such as innovation accounting:

http://www.businessopportunity.com/Blog/innovation-accounting-lean-star…

http://www.inc.com/eric-ries/entrepreneur-eric-ries-innovation-accounti…

How you can help me to understand ROI. Can you tell in which cases ROI can be calculated. Lets say if the Value is in the form Revenue, How do I calculate ROI.

If innovation isn't valued, you can assume nothing will be learned or improved. That means you could *try* to calculate an ROI forecast by:

- Having stakeholders estimate the value of each item in the Product Backlog using value poker, or whatever other method they see fit
- Having the Development Team estimate the size of the Product Backlog, and their likely velocity each sprint
- Divide size by velocity to give the projected number of sprints
- Divide the total estimated value of the Product Backlog by the projected number of sprints to give the projected value per sprint
- Estimate the cost for funding each sprint, taking into account team size and salaries, fixed costs etc.
- Divide the projected value per sprint by estimated cost per sprint to give the projected ROI per sprint.

But if you tried to be that predictive about ROI, and didn't care about innovation accounting, why use an agile approach in the first place?

If Value is calculated in Revenue then it's important to know what the revenue would be with the feature included and without the feature included. The sponsor would know. Just a nice question to ask... let him/her start thinking differently.

If the feature is part of a core product with 5 features and the feature would take up 50% of the development time and the end product has an expected revenue of $5M, and your total project will cost $2M, then a simple calculation would be that the feature cost $1M and generate $2.5M... but this is of course not true as we can not sell this feature on it's own. It's part of the core product and only generates revenue when the full product is sold. It's like asking Microsoft what the ROI is for the feature of being able to save a document in WORD...

If the feature is not part of the core product then again the question can be asked what the revenue would be with or without the feature. Again Sponsor should know... not your responsibility to figure out. If they want $ calculations from you, they should provide the figures to work with.

Hi Ian Mitchell, I'm a Product Owner and I have a few questions.

1. What did you mean in "Divide size by velocity"? What is this size?

2. "and their likely velocity each sprint", do you mean sum their PBIs estimation plus last sprints estimatives?

3. "Divide the total estimated value of the Product Backlog by the projected number of sprints to give the projected value per sprint", so should I consider past sprints?

I'm trying to calculate ROI, however my team didn't use business value before i started, actually, I'm still in the process with my stakeholder (boss) to valuate each PBI, and we're working on high size estimative for the rest of backlog. 

Any advice?

Thank you.

1. What did you mean in "Divide size by velocity"? What is this size?

The estimated size of the Product Backlog. If this is divided by velocity a forecast can be made regarding the likely number of Sprints to completion.

2. "and their likely velocity each sprint", do you mean sum their PBIs estimation plus last sprints estimatives?

The team should average the velocity they have demonstrated each Sprint, or if they have no such evidence, simply make the best estimate they can regarding future velocity.

3. "Divide the total estimated value of the Product Backlog by the projected number of sprints to give the projected value per sprint", so should I consider past sprints?

No, because the work completed in previous Sprints will no longer be on the Product Backlog. It will have already been invested in the product. However, any value previously delivered by the team for the product represents a learning opportunity, and this may help when estimating the value of work remaining.

Hi again Ian Mitchell,

Still have few questions:

When you say "The estimated size of the Product Backlog", is the total of business value considering each PBI?

Because you say this as well "Divide the total estimated value of the Product Backlog", are them the same thing?

So should be something like:

1> Total Backlog Business Value / Velocity of sprint = Projected number of sprint

2> Total Backlog Business Value / Projected number of sprint = Projected value per sprint

3> projected value per sprint / sprint costs = ROI

As:

Total Backlog Business Value = the total of each BV per item.

Velocity of sprint = team average velocity.

Thank you!

The estimated size of the Product Backlog is distinct from any value. Product Backlog items have a description, a value, an order, and an estimate. The purpose of estimation is to help a Development Team figure out how much work they can take on, independently of whatever items may be worth.

To forecast the remaining number of Sprints, the estimates of each item may be added up and divided by the team’s velocity. Value would not be considered in that specific calculation.

Hi Ian Mitchell, 

Now makes more sense :)

So the calculation will be:

1. Sprint Estimative divided by team velocity = projected # of sprint

2. Total Estimated items on backlog divided by projected # of sprint = projected value per sprint

3. Projected value per sprint divided by sprint costs = ROI

Last question, I promise, why then did you say "Having stakeholders estimate the value of each item in the Product Backlog using value poker, or whatever other method they see fit"? What is that for?

Thank you very much!

Best,

The projected value per Sprint comes from adding up the value attributed to each item in the Product Backlog, and dividing the total by the projected number of Sprints. This part of the calculation does not involve the estimated size of items.

Bear in mind that I don’t recommend this calculation be used at all, instead it is better to use innovation accounting.