The Cost of Value Delivered

Article Agile

How leaders align cost with value delivered, and estimate the relationship between timelines and cost for delivering Agile transformation. 

Do you know executives who oversee allocated budget and solutions for their division that want to know how long it will take to deliver an Initiative or an Epic? As difficult as the ‘how long’ question might be to answer, it indicates that your leader actually understands the meaning of value-based delivery!

“When will it be done?” is very closely related to “how much it will cost?” and that relationship is exactly what we discuss today.

Review of Agile and a Common Misconception

‘Customer collaboration over contract negotiation’ is part of the Manifesto for Agile Software Development, which was created in 2001 by seventeen experts in software engineering. They gathered to discuss better ways of developing software and thus, this declaration was signed. This Manifesto for Agile Software Development, along with the 12 Agile principles is part of any Agile 101 training. Over the years, with large companies going through massive Digital Transformations, we often remind ourselves and our clients that Agile is not about Scrum, it is not about checking off ceremonies that teams attend, and it is not about checklists. We remind folks of the small print in that Manifesto that states that ‘while there is value in the items on the right, we value the items on the left more.’

Individuals and interactions over processes and tools
Working software over comprehensive documentation
Customer collaboration over contract negotiation
Responding to change over following a plan

Whenever we run trainings for teams and leaders, we always start with the following question: “When you hear the word AGILE, what are the first few things that come to your mind?”

Common responses include:

  • Iterative Approach
  • Flexible
  • Scrum
  • DevOps
  • Customer Value
  • Collaboration

At first glance, it seems like a straight forward question. However, when we start peeling the onion, we often recognize many common frustrations across all organizational levels including:  

  • Leaders want/need to know when things will be delivered
  • Leaders assume that team members just don’t want to go through the effort of estimation
  • Teams don’t trust leaders when it comes to making any kind of promises and are afraid that if something doesn’t go as planned, there will be repercussions
  • In some cases, team members just don’t want to be wrong … because who does?!
  • Frustration occurs because teams are misaligned in the organization, and have to heavily depend on other resources and leadership guidance for the work to be accurately estimated
  • The most common misconception comes from the last phrase of the manifesto, which reads ‘responding to change over following a plan’

A common misconception and assumption is that when leaders set a date and require teams to estimate and plan their work, then they are no longer an Agile shop. Not true at all! So, the question is, if you are an Agile Shop, how do you go about having delivery dates, work planned, and understand the Cost of Delivery?

A common misconception among leaders is that setting deadlines and estimating project plans means they are no longer an Agile shop - not true at all.

Quick Answer for Dates and Planning:

It is all about setting milestones, which is more of a project management term but is still widely used. You can also call it frequent check-ins and honest communication to determine if project execution is going according to plan. Calculating the cost, however, does not have a quick solution.

Including HR and Finance from Day One

Companies must involve HR and finance in the transformation journey. Agile is about individuals and interactions and to achieve an iterative approach, to deliver value as efficiently as possible, and to calculate the cost, people need to be organized in an efficient way. You may have small teams (3-6 people), medium teams (5-9 people), and large teams (8-12 people), but the key is to be cross-functional and stable, meaning do not move people around to the extent that circumstances allow. Once you have stable teams, you can attached a price tag to a team. For example, let’s say an average salary per team member is $100K:

  • Small team (3-6 people) – $300-$600K
  • Medium team (5-9 people) – $500-$900K
  • Large team (8-12 people) – $800K-$1200K

Now that we have a general idea of team cost, we can walk through how to calculate the cost of an Initiative or an Epic. Note that this is as applicable to embracing a Digital Transformation as it is to developing a product.

Calculating the Cost of Initiatives and Epics

Let’s say you have a large Initiative, which is broken down into five different Epics. Ideally you would like each Epic to go to one team, so they can implement it from the beginning to the end, but this is rarely the case in large organizations. To start, however, let’s use the following example.

Example:

INITIATIVE

EPIC1 | EPIC2 | EPIC3 | EPIC4 | EPIC5

Question #1: Which team (based on skills, resources, etc.) can take on the Epic?

  • Let’s say you have multiple teams with skills that could support this work. You discuss a few potential approaches with key players, and decide that one of your medium-size teams will take on the work.
  • We know that the average cost of a medium team per year is $500K-$900K.
  • The team goes through a Program Increment (PI) planning (or any other flavor of planning, the outcome of which is Epics broken down into user stories and put into iterations).

Question #2: How big is the Epic (i.e. how much time it will take in number of Sprints, for example)?

  • To answer Question #2, you take the output of the planning session and say, for this particular team, it will take say 12 two-week Iterations or 24 weeks to get this done.
    • It is best to break down an Epic so that it does not take more than a few months. If the effort you are trying to estimate takes longer than six sprints, that is a red flag that you need to further break down the work.
    • Provide a range estimate for large initiatives, such as minimum 12 and maximum 16 sprints. For this example, we will say 12 sprints and estimate 24 weeks total.
  • Based on 52 working weeks in a year, the cost of this Epic would be between $231K and $415K.
    • ($500K divided by 52 week and multiplied by 24 weeks) and (900K divided by 52 weeks and multiplied by 24 weeks)

Question #3: What would it take to deliver by [target date]?

  • To answer Question #3, let’s say 24 weeks just isn’t cutting it. With an Agile mindset, you want to avoid setting dates and making promises as much as possible. When there is no way around it, consider what can be done to ensure delivery by the target date.
  • Maybe the work could be broken down so that two teams can work on it simultaneously. Perhaps the work goes to a larger team who can complete it in 16 weeks.
    • For example, let’s say this team of 10 people works at $100K average per year, so the cost would be $1 million.
    • To calculate the cost of this particular Epic, which would take 16 weeks, by this particular team, which costs $1 million, (1 million divided by 52 weeks and multiplied by 16 weeks) it would cost $308K per the same Epic that would take 8 sprints to complete.
  • Now, you have to decide if there is return on investment (ROI)! Getting it done four sprints faster would get this Epic into the customers’ hands two months sooner, but will cost around 30K more. Consider the value you are delivering to the client and how the client will benefit from getting it earlier.  

Conclusion

When moving from a project based to a value based delivery model, it is important to consider how work is financed. Misalignment between budget allocation and how the teams are working can result in significant frustration. When adopting an Agile way of working, it is important to remember that the focus is on people, interactions, communication, collaboration, and value delivered. It is a best practice not to set dates or make promises without first consulting the people who would be performing the work, and allowing them to estimate the timeline to the best of their ability. Frequent check-ins to determine how the work is tracking against set plans will foster those honest conversations, and allow your teams to respond to change in a collaborative way.