The Business Case for Agile Seattle Scrum Gathering

Transcription

1 The Business Case for Agile Seattle Scrum Gathering

2 Audience Introduction

3 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

4 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

5 Financial Management in an increasingly uncertain world 5/20/2011 5

6 New Technology Adoption 30 Number of Years for New Technology to be Adopted by 25% of US Households # of Years 5 0

7 Computer processing (Moore s Law) 1,600,000,000 Transistors 1,400,000,000 1,200,000,000 1,000,000, ,000,000 Transistors 600,000, ,000, ,000,

8 Adoption rates: Facebook & Twitter Facebook Active Users (per million) Twitter Number of Unique Visitors ,000, ,000, ,000, Active Users 15,000,000 # of Monthly Visitors ,000, ,000,

9 Technology change is accelerating Rate of Technology Change from

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

11 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

12 As project uncertainty increases, expected return reduces Investment Expected Return Investment Return horizon shrinking Investment Expected Return

13 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

14 Snapshot from 1971 Rate of Technology Change vs. Product Lifecycle

15 The good old days With a slower pace of technological change, project returns were more certain Expected Return Horizon

16 Project business case Quantifiable market opportunity Estimated cost of investment Program governance & control Harvest the return over multiple years

17 The good old days: Midwest asphalt distributor 1960s mini-empire Largely rural areas Time capsule

18 Snapshot from 2001 Rate of Technology Change vs. Product Lifecycle

19 Mounting uncertainty As the change curve increases, certainty of project return decreases Expected Return Horizon

20 Mounting uncertainty: Lighting manufacturer Domestic manufacturing Move to Mexico The industry moved to China

21 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 decisionmaking to what?

22 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

23 The Acme Payphone Component company Business Situation $10 million capital budget Industry experiencing good growth Projected unit growth excellent Where is the market going: Limited local calls Heavy reliance on phone cards Need a competitive advantage Bet the farm project Credit card interface Replace the need for change Replace phone cards Three year project Percent of capital budget: 100% Likelihood of success: can t miss!

24 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 3.0 # of Payphones (per million)

25 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?

26 Real Options

27 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.

28 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

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

30 Real Options decision tree Assumption #3 Yes Assumption #2 Yes No Assumption #1 No STOP STOP

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

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

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

34 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

35 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

36 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

37 Real Options applied to portfolio management

38 Traditional Project Portfolio Fewer Investments Limited control within period Can t offset costs with returns Can t measure portfolio return

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

40 Applying Real Options to the portfolio Understand the market Break projects into a series of options Reallocate investment Increase/Delay/Stop

41 Capital allocation : past & future Past Future Investment Investment Big Bang Option Based Big Bang Option Based

42 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

43 Multiple bets and reallocating funds to winners

44 Quantifying the Benefits

45 Baseline Business Case Regressive Insurance Project Profile Amount 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

46 Baseline Business Case Regressive Insurance Project Profile Amount Capital Budget $4,800,000 Net Monthly Cash Flow (after release) $150,000 IRR (Five Years) 18.5% Internal IRR Threshold 15% 46

47 Baseline monthly cash flow 200, , (100,000) (200,000) (300,000) (400,000) (500,000) 5/20/

48 Project payback period: month 43 3,000, ,000, ,000, (1,000,000.00) (2,000,000.00) Investment Breakeven Return (3,000,000.00) (4,000,000.00) (5,000,000.00) (6,000,000.00) Peak

49 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

50 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

51 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

52 After three months, cash receipts reduce overall cash investment $200,000 $100,000 $ $(100,000) $(200,000) $(300,000) $(400,000) $(500,000)

53 Cash investment is reduced and breakeven is reached at month 37 $4,000,000 $3,000,000 $2,000,000 $1,000,000 Breakeven Return $- $(1,000,000) $(2,000,000) Investment Agile Waterfall $(3,000,000) $(4,000,000) $(5,000,000) Peak $(6,000,000)

54 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

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

56 Write-off risk is capped after the first release $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 Write Off Risk $- Waterfall R1 R2 R3 R4 R5 R6 R7 R8 R9 R10

57 The capital expense is the same, but cash requirements and overall risk are reduced $6,000,000 $5,000,000 $4,000,000 $3,000,000 Captial Budget Cash Budget Write-Off Risk $2,000,000 $1,000,000 $- Waterfall R1 R2 R3 R4 R5 R6 R7 R8 R9 R10

58 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/

59 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

60 The first few releases have impressive returns 250.0% 200.0% 150.0% 100.0% 50.0% 0.0% 15% Hurdle Rate Waterfall R1 R2 R3 R4 R5 R6 R7 R8 R9 R %

61 but as lower value items are released, return diminishes below the hurdle rate 250.0% 200.0% 150.0% 100.0% 50.0% 0.0% 15% Hurdle Rate Waterfall R1 R2 R3 R4 R5 R6 R7 R8 R9 R %

62 By dropping the last three iterations, project return and risk profile improves $6,000,000 $5,000,000 $4,000,000 $3,000,000 Capital Cash Write-Off $2,000,000 $1,000,000 $- Waterfall R1 R2 R3 R4 R5 R6 R7 R8 R9 R10

63 Investment is reduced and dollar return increases $4,000,000 $3,000,000 $2,000,000 $1,000,000 Breakeven Return $- $(1,000,000) $(2,000,000) Investment Waterfall Agile Agile Modified $(3,000,000) $(4,000,000) Peak $(5,000,000) $(6,000,000) 5/20/

64 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/

65 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%

66 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?

67 All this before we consider the value of lean waste reduction Some Types of Waste Examples Inventory Process Waste Estimation Buffers Waiting Gold Plating Fully completed functional spec ages Much not used until late or not at all 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 Margin of error buffers added by each function Testers waiting for developers to complete their tasks & vice versa Overbuilding specifications

68 Putting it all together

90 Agile project management Executive Business Product Owner PMO $$$$$ $$$$$ Agile $$$$$ $$$$$ Sprint 12 $ $ Release N $$$$ $$$$ Release 2 $$$$ $$$$ Release 1 $$ $$ Copyright 2010 SolutionsIQ. All rights reserved.

99 Agile project management scorecard 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 Copyright 2010 SolutionsIQ. All rights reserved.

100 Capital project 2012 Inescapable uncertainty in business case decision = Risky Profile Good Idea Time Scope Budget Agile project management is not enough Copyright 2010 SolutionsIQ. All rights reserved.

109 Business case for each release Executive PMO $$$$$ $$$$$ Agile $$$$$ $$$$$ Sprint 12 $ $ Business Case for Release 2 Market feedback Release 1 $$ $$ No Copyright 2010 SolutionsIQ. All rights reserved.

110 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 Copyright 2010 SolutionsIQ. All rights reserved.