Domain II: Value-Driven Delivery: Part 1

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 Learning Objectives

By the end of this lesson, you will be able to:

Explain and quantify the time value of money

Forecast the financial feasibility of a project using metrics

such as return of investment (ROI), net present value (NPV),
internal rate of return (IRR), and payback period

Prioritize the functional requirements for agile projects using

techniques such as MoSCoW, Kano model, and relative
weighting

Discuss how to prioritize non-functional requirements for

agile projects

Describe how to manage risk and risk-adjusted product

backlog
Quantifying Customer Value
 Meaning of Value

Value is a measure of benefit created through the delivery of goods or services. Value is not always
related to monetary benefits.

Some measures of value are:

Customer Employee
Revenue or Profit Innovation Rate
Satisfaction Satisfaction

Enhanced
Social or Economic Compliance
Knowledge Gained Reputation or
Benefit Achieved
Image
 Forecasting Value

• All projects require forecasting of cost, schedule, budget,

resource requirements, and technology trends

• Even the most agile organizations require forecasts

• Forecasting the value of a project helps organizations decide

whether the project should be undertaken or stopped (fail
fast)

• The product owner is responsible for maximizing the project

value; however, inputs can be provided by the entire project
team. They prioritize the backlog based on the business
value and gather inputs from the entire project team and
stakeholders
 Time Value of Money

Time value of money is a key concept to consider while forecasting the rate of return from a project.

This concept implies that:

The money available in the present is

There is a potential to earn more money
worth more than the same amount in
through capitalized interest
the future
 Time Value of Money

Future Value Present Value

FVN = PV(1 + i)
N FV
PV = N
(1 + i)

Where,
PV = Present value of a sum of money
FV = Future value of a sum of money
N = Number of years
i = Interest rate
 Time Value of Money

You invest in projects today to gain value from it in the future.

Q If you have $100 today and wish to invest it at a rate of return of 10% for three years,
how much will you earn by the end of the third year?

A The formula for calculating future value is:

FVN = PV(1 + i)
N

FVN = 100 (1 + 10%)3 = 100 (1.331) = 133.10

Therefore, $100 today is worth $133.10 in three years with a 10% interest rate compounded
annually.

Conversely, $133.10 earned three years down the line is worth only $100 in today’s terms.
Financial Feasibility of Projects
 Financial Feasibility of Projects

The projects are undertaken:

To increase revenue To reduce cost

For regulatory compliance For performance improvement

 Financial Feasibility of Projects

• The financial feasibility study is performed by product owners to determine the

profitability of the project

• This analysis is reviewed by project sponsors

• The metrics used to forecast the financial feasibility of a project include:

Return of investment (ROI) Net present value (NPV)

Internal rate of return (IRR) Payback period

 Return on Investment (ROI)

• ROI is used to evaluate the efficiency of an investment or to compare the efficiency of a number
of different investments

• Many organizations have a required rate of return or a minimum acceptable rate of return for
projects

• The higher the ROI, the better the results

• ROI is calculated using the formula:

Annual savings or benefits

ROI =
Investment
Investment
 Net Present Value (NPV)

• NPV is a method of calculating the expected net monetary gain or loss from a project

• It is done by discounting all the expected future cash inflows and outflows to the present value

• It is a measure of the amount of money the project is expected to earn in today’s value

• It is used to compare and prioritize projects

• The decision rule of NPV is if the NPV is positive, accept the project

• There are some exceptions when projects with negative NPV is accepted, such as government
mandates, regulations, new standards
NPV Formula
 NPV: Example

Q The details of Project 1 and Project 2 along with their cash flow for a period of five years, at an
interest rate of 10%, is given in the table. Which is the best project to select?
 NPV Example

Note: the cash flow of both the projects are the same, but NPVs are different. Higher the NPV, better
the project. Project 2 must be selected over Project 1 as it has a higher NPV.
 Internal Rate of Return (IRR)

• IRR is the rate at which the project adds value to the organization

• To calculate the IRR, treat the rate of interest as a variable and find the rate at which the
present value of benefits equal the present value of costs

• Most companies have a minimum IRR that a project must meet

• A ready-made formula is available in Microsoft Excel for calculating IRR

• Projects with higher IRR are preferred by organizations

 IRR: Example

Q • Project A has an investment of $200,000 and generates an IRR of 27%

• Project B has an initial investment of $100,000 and an IRR of 43%

Which is the best project to choose from?

• The IRRs of projects A and B are 27% and 43%, respectively

• Project B must be selected as it has a higher IRR than Project A
 Payback Period

• Payback period is the amount of time taken to regain the net amount invested in a project in
the form of net cash inflows

• The advantages of this method are:

o The calculations and interpretations are straightforward

o The payback period measures the amount and duration of financial risk taken by the
organization

o It allows organizations to have a short payback period, especially for IT projects

19
 Payback Period: Example

Q The summary of a project’s financial measures for a period of five years is given in the table.

Using this data, determine the NPV, ROI, and payback period of the project.

20
 Payback Period: Example

A Using the discount factor, determine the present value of cost for each year. Similarly, determine
the discounted benefit for each year.
 Payback Period: Example

A NPV ROI

(Present values of the expected monetary (Projected savings or benefits) − (Costs)

gains) - (Present values of the costs) (Costs)

Based on the data: Based on the data:

NPV = 9744 – 7426 = 2318 ROI =
9744−7426
= 31%
7426

Payback Period

Based on the data, the cumulative benefit + cost becomes positive in the fifth year.
Therefore, the payback period will tentatively be after the fourth year.
Prioritization of Functional Requirements
 Prioritization

• Prioritization identifies high-value features and gets them delivered based on their priority

• It helps organizations provide maximum benefits to the customer

• It decides the order of requirements for the team to work on

• Prioritization adjusts the scope to meet budget or timeline objectives while retaining a useful set of
functionality (minimum marketable release)

• It enables you to decide the release planning, iteration planning, and plan for new requirements

• It determines the low priority or non-value adding tasks to avoid working on them
 Factors in Prioritization

The value could be expressed as:

Financial value delivery
by features
• New revenue
• Incremental revenue
• Additional revenue from existing customers
• Operational efficiency
• Cost reduction

Cost of developing
the new features The value and cost together indicate the return
on investment for new features.
 Factors in Prioritization

Amount and significance of

learning and the new knowledge • The learning can be leveraged in
gained while developing the the future.
features

• Risk incurred by introducing the new

Risk removed by features
developing the features • Risk eliminated by introducing the new
features
 Prioritization List

• It is recommended to maintain a single prioritized list or product backlog to ease the process of
prioritization and planning

• The list contains:

o Functional requirements

o Non-functional requirements like responsiveness, performance, reliability, and supportability

o Defects such as cosmetic issues and other issues

o Change requests like new requests

o Work needed to reduce risks

o Process improvement actions

 Prioritization Techniques

The product owner, business stakeholders, and the team work together to refine
the backlog and ensure it reflects the right priorities.

The term refining the backlog refers to the process of continuously prioritizing the backlog.
Prioritization Techniques
 Prioritization Techniques

There are three prioritization techniques that can be applied within agile.

MoSCoW Kano model Relative weighting

 MoSCoW

Dynamic systems development method (DSDM), an agile methodology, recommends prioritization of

requirements using the MoSCoW technique.

Must: Mandatory requirements

Should: Desirable requirements

Could: Nice to have requirements

Won’t: Requirements that can be worked on later

 MoSCoW: Example

Q Nutri Worldwide Inc. wants to launch a new website where orders for consumer durables can be
placed online. Tom, the product owner, is facing the challenge of prioritizing the following
requirements:

Hardware Search options Online

setup on the website payment

Order Shipment
Customer
placement update
registration
through SMS

Customer Capture
login shipping
details

If Tom has to use the MoSCoW prioritization technique, which of these requirements will fall
under the categories of must have, should have, and could have?
 MoSCoW: Example

A Tom can prioritize the requirements using the MoSCoW technique as follows:

Must Have Requirements Should or Could Have Requirements

Are non-negotiable and directly impact the Are less important or nice-to-have features, their
success of the project difference is determined by the level of cost or
loss of business value created by not
implementing a feature
Hardware setup Customer
registration

Search options
on the website Customer login

Order placement Online payment

Capture shipping Shipment update

details through SMS
 Kano Model

• Kano model strives to fulfill requirements and ensure

customer satisfaction

• The requirements are prioritized based on the:

o Mandatory or threshold
o Linear or utility
o Exciters or delighters

Noriaki Kano
 Kano Model

Customer
Satisfaction

• Two factors impact the satisfaction level: Delight

1. Existence of the features Linear or
Utility
2. Degree of the implementation Exciters or
Immediate Delighters Degree of
happiness implementation
• Some features have a linear relationship Poor Good
with the satisfaction level Mandatory or
Not Threshold
• Other features have an exponential unhappy
relationship
Disappointed
 Kano Model: Example

Q A big mobile handset company is planning to launch a new version of their mobile. Jefferson, the
product owner, has come up with a list of features which need to be developed and included in the
mobile.

If Jefferson chooses to use the Kano model for prioritizing the requirements, which of these
requirements will fall under different categories?

Phone
Call logs Bluetooth
book

Infrared
Calling Time
transfer

Instant file
Messaging Camera transfer
 Kano Model: Example

A The requirements can be differentiated using Kano analysis as follows:

Threshold Linear Features Exciters and Delighters

Presence of these features Customer satisfaction These features bring immense
does not result in increased improves in a linear manner customer satisfaction. They are
customer satisfaction. as the number of features time-consuming and costly to

Phone book increase. develop.

Instant file
Calling Camera
transfer

Messaging
Bluetooth

Call logs
Infrared
transfer
Time
 Relative Weighting

Relative weighting technique is based on a scoring model that

provides a ranking to:

• The benefit of having a feature

• A penalty for not having it

• The cost of building and maintaining a feature

• The risk involved in building and maintaining a feature

Karl Wiegers
 Relative Weighting

• Value score is the combination of benefit score and penalty score

• Weights are assigned based on the outlook towards the product:

o Higher weight for value if the purpose is to maximize value

o Higher weight for cost if the purpose is to minimize cost

o Higher weight for risk if the purpose is to minimize risk

Priority is calculated using this numeric formula:

𝑉𝑎𝑙𝑢𝑒 𝑊𝑒𝑖𝑔ℎ𝑡 ∗ 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟𝑐𝑒𝑛𝑡

𝑃𝑟𝑖𝑜𝑟𝑖𝑡𝑦 =
𝐶𝑜𝑠𝑡 𝑊𝑒𝑖𝑔ℎ𝑡 ∗ 𝐶𝑜𝑠𝑡 𝑃𝑒𝑟𝑐𝑒𝑛𝑡 + 𝑅𝑖𝑠𝑘 𝑊𝑒𝑖𝑔ℎ𝑡 ∗ 𝑅𝑖𝑠𝑘 𝑃𝑒𝑟𝑐𝑒𝑛𝑡
 Relative Weighting: Example

Each feature is prioritized based on its relative weighting for benefits, penalties, costs, and risks. Each
feature uses a relative scale of 1–9 to determine its rating.

Feature Benefit Penalty Total Value % Relative Cost % Relative Risk % Priority
Value Cost Risk

Feature 1 8 2 10 27% 2 20% 3 17% .73

Feature 2 8 3 11 30% 4 40% 6 33% .39
Feature 3 7 4 11 30% 3 30% 7 39% .43
Feature 4 3 2 5 13% 1 10% 2 11% .62
TOTAL 26 11 37 100% 10 100% 18 100%

𝑉𝑎𝑙𝑢𝑒 𝑊𝑒𝑖𝑔ℎ𝑡 ∗ 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟𝑐𝑒𝑛𝑡

𝑃𝑟𝑖𝑜𝑟𝑖𝑡𝑦 =
𝐶𝑜𝑠𝑡 𝑊𝑒𝑖𝑔ℎ𝑡 ∗ 𝐶𝑜𝑠𝑡 𝑃𝑒𝑟𝑐𝑒𝑛𝑡 + 𝑅𝑖𝑠𝑘 𝑊𝑒𝑖𝑔ℎ𝑡 ∗ 𝑅𝑖𝑠𝑘 𝑃𝑒𝑟𝑐𝑒𝑛𝑡
Prioritization of Non-Functional Requirements
 Non-Functional Requirements

Non-functional requirements define how well the system should perform. Some of them are:

Security Scalability Performance Robustness

Portability Maintainability Reliability Safety

Usability Response time Stability Fault tolerance

Some of the non-functional requirements are global in nature and can be applied across all
requirements, while some are specific to individual requirements.
 Prioritization of Non-Functional Requirements

Prioritized backlog
Non-functional requirements should also be prioritized in line with other with non-functional
functional requirements. requirements

Points to remember:
• Proactively addressing the non-functional requirement helps in
minimizing the probability of project failure
• Non-functional requirements also undergo progressive elaboration
and emerge throughout the project life cycle
• Some of the non-functional requirements are evident at the beginning
of the project. However, they need to be actively sought out as the
project progresses
• A product owner should involve the right set of experts to clarify these
as early as possible
Risk Management in Agile
 Risk Management in Agile

Risks should be managed proactively. A well-known way of managing risks is to:

• Compute the expected monetary value (EMV) of the negative risks

• Ensure that driving down risk quickly should be a strategy by prioritizing risky stories earlier

• The goal of each iteration should be to progressively de-risk the project

EMV can be calculated using the formula:

EMV = Risk impact in $ X Risk probability (as %)

 Risk Adjusted Product Backlog: Example

Prioritized Risk Adjusted

Backlog Product Backlog
• Two key risks identified by the project team and their EMVs are:
o EMV of Risk 1 = $9000 X 65% = 5850
o EMV of Risk 2 = $8000 X 67% = 5360

• Risks should be addressed at the beginning of the project life cycle

by including the risk responses in the product backlog

• You can derive the risk-adjusted prioritized product backlog, which

helps in maximizing the total value proposition over time
Knowledge Check
Knowledge
Check
Which of the following factors is least important in prioritization?
1

A. Financial value of features

B. Cost of developing new features

C. Amount of risks removed by developing features

D. Cost of removing new features

 Knowledge
Check
Which of the following factors is least important in prioritization?
1

A. Financial value of features

B. Cost of developing new features

C. Amount of risks removed by developing features

D. Cost of removing new features

The correct answer is D

Cost of removing new features is not a factor used in prioritization.

Knowledge
Check In the Kano model, a new feature such as a 1,000-hour battery life on a cell phone
would fall into _______ category?
2

A. Threshold (Must have)

B. Linear (performance requirements)

C. Exciters and delighters

D. Indifferent
 Knowledge
Check In the Kano model, a new feature such as a 1,000-hour battery life on a cell phone
would fall into _______ category?
2

A. Threshold (Must have)

B. Linear (performance requirements)

C. Exciters and delighters

D. Indifferent

The correct answer is C

Most cell phone users would be excited/delighted with a phone that has a 1,000-hour battery life. Therefore, this
would fall into the exciters and delighters category.
Knowledge
Check
How do agile projects manage risks?
3

A. By ensuring the risks are associated with user stories and completing them in the iteration

B. By adopting test-driven development

C. By adding risk stories to the backlog and completing them during the last iteration

D. By adding total exposure points to every story based on the risk census
 Knowledge
Check
How do agile projects manage risks?
3

A. By ensuring the risks are associated with user stories and completing them in the iteration

B. By adopting test-driven development

C. By adding risk stories to the backlog and completing them during the last iteration

D. By adding total exposure points to every story based on the risk census

The correct answer is A

Agile methods de-risk the projects by ensuring that risks are associated with user stories and completing these
stories early in the iteration schedule.
 Key Takeaways

Customer value must be the central concern for an agile team.

The financial feasibility can be forecasted using various

techniques like return of investment (ROI), net present value
(NPV), internal rate of return (IRR), and payback period.

Prioritization of functional requirements can be done using

various techniques such as MoSCoW, Kano model, and relative
weighting.

Non-functional requirements should also be prioritized in line

with other functional requirements.

Risks should be managed proactively by computing the expected

monetary value (EMV) of the negative risks.