When securing funding, prioritising and/or scheduling the delivery of a series of requirements, a Product Owner or Product Manager must consider a number of factors.
Some of these factors might include:
- Business Case – including NPV, ROI and IRR
The first question you need to ask is – Why do I want to do make this investment?
These questions and answers will more often than not be raised and answered by the Product Owner, however the Product Manager will play an active role in contributing to this investigation.
This may be for a number of reasons e.g.
- Return on Investment (“ROI”) – it will deliver a financial return
- Strategic investment – it will help to protect your market position
- Compliance – it will ensure you stay within the law
Although ROI can be measured in terms of financial gain, a Strategic/Compliance – lead investment may be justified and/or measured through Opportunity Cost i.e. the cost of not making this investment (v.s. an alternative course of action that may include doing nothing at all).
There may also be intangible benefits delivered through making an investment – e.g. stakeholder satisfaction. In these cases it’s best to use proxy measurements to provide some indication of return e.g. if my stakeholder is satisfied, he/she will purchase more, which will in turn lead to a financial Return on Investment.
Return on Investment and Internal Rate of Return
In the event you need to secure investment to fund this development – you may be asked to model the return using an ROI/IRR model.
IRR stands for Internal Rate of Return. The IRR, measured in % return p/a, is essentially equal to the (annualized) interest rate a bank would have to pay you to match the performance of your portfolio – so if the bank interest rate is 2% and you’re forecasting a 12% return, you’re doing well.
Net Present Value and Cost
With that said, you can’t look at IRR alone – you also need to consider Net Present Value i.e. the value of the investment once you’ve taken all of the costs (including opportunity cost) into consideration. NPV is measured as a number (hopefully) between 0 and 1.
Wikipedia offers a good summary of NPV:
|NPV > 0||the investment would add value to the firm||the project may be accepted|
|NPV < 0||the investment would subtract value from the firm||the project should be rejected|
|NPV = 0||the investment would neither gain nor lose value for the firm||We should be indifferent in the decision whether to accept or reject the project. This project adds no monetary value. Decision should be based on other criteria, e.g. strategic positioning or other factors not explicitly included in the calculation.|
Return on Investment Model
Here’s a sample ROI model that I just pulled together (and before you ask – yes, it’s totally fictitious!).:)
You will notice that there are three distinct input areas:
- What are the costs associated with delivering the asset?
- What are the benefits (revenue) that will be realised as a direct result of making this investment?
- What are the additional costs associated with realising this return e.g. maintenance/support/cost of sale
The outputs are:
- Payback years – the number of years it will take to break even
- IRR 5 years – in this example, we’re interested in the percentage return over 5 years
- NPV – the value of the investment
Risk – Risk vs. Value Matrix
Once you’ve calculated the potential Net value that could/would be created by proceeding with this investment, we need to consider the Risk involved in delivering the value.
The golden ticked is clearly a High Value, Low Cost, Low Risk opportunity.
One good way to represent the relative relationships between NPV and Risk is via a Risk vs. Value Matrix.
For more information about Risk, see: Agile Risk Management for Projects and Programmes.
In its simplest form – this asks the question – “do you have what it takes to get the job done?”
Do you have the capital required to kick-off the project? It may be that you only need a fraction of the total project cost to deliver the end value (see: Self-Funding Projects – a Benefit of Agile Software Development).
Do you have the human resource required to deliver the project e.g. headcount and/or skills?What about additional hardware to cope with growth (?) or the operational budget to support the ongoing maintenance overhead?
Are you able to deliver multiple projects or requirements in parallel or do you need to deliver them consecutively? It may be that you have sufficient funding to hire additional resource.
In short, your capacity to deliver this value will no doubt impact your ability to deliver the value and the timescales you’ll need to work to.
It’s important to point out that these (capacity) costs will have been factored into your initial ROI/IRR/NPV calculations. Depending on the risk involved, a funding board may or may not be prepared to commit to the initial and ongoing investment.
Project/Product dependencies may impact cost, risk, value or timescales. These must also be taken into consideration when defining a delivery plan and deciding on whether or not to request or grant funding.
Some (of the hundreds of) questions you might ask yourself include:
- Do you have sufficient resource to deliver the project?
- How long would it take to hire additional resource? And get ‘up to speed’?
- Are you able to deliver multiple elements or projects in parallel?
- What’s the net impact of dedicating your available resource to this project e.g. on Business As Usual or on Other projects?
- Are there any industry/business milestones driving these priorities?
- Is this project dependent upon the completion of another project or part of a project?
- Does this project need to be delivered by a certain date in order achieve its value?
- What is the impact of not delivering this project before or after another project?
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