MGP 535- Agile Project

Management
Session 6
Domain II—Value-Driven Delivery

MGP 535- Agile Project Management – Claude El Nakhl Khalil 1

Learning objectives

• Explain the concept of Time Value of Money

• Take project decisions based on NPV, IRR, ROI, and payback period
of a project
• Describe customer-value prioritization
• Discuss the various prioritization techniques
• Explain Risk Adjusted product backlog

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 Value
• Value is a measure of benefit created through delivery of goods or services. Value is not always
related to monetary benefits, significant increase in the customer satisfaction also delivers value
to the organization.
• An organization can choose different measures to gauge the value delivered. Some of them are:

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Forecasting Value
All projects require forecasting such as cost, schedule, budget, resource requirements, and technology
trends. Even the most Agile organization require forecasts.

Forecasting the value of a project helps organizations decide whether the project is beneficial to
proceed or to stop the project (Fail Fast).

Product Owner is responsible for maximizing the project value; however inputs can be provided by the
entire project team.

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Time Value of Money
Time Value of Money is a key concept to be considered while forecasting the expected value return
of the project.
This concept implies the following:
• The money available in the present is worth more in the future.
• The potential to earn more money through interest is capitalized, if the money is available today,
against the same quantum of money made available in the future.

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Time Value of Money—Example
Suppose you have $10,000 today, you can translate this money into $11,000 at the end of 3 years by
investing in instruments such as Bonds and Fixed Deposits.

On the contrary, if you were to receive the same amount of money in future ($10,000 in this
example), then its value today is less, due to:
• Inflation
• No interest earned

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Time value Of Money- Terminologies
The terminologies used while determining the Time Value of Money are:

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Future Value and Present Value-Formulas

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 Future Value and Present Value- Example
An example for calculating future value is:
• If you have $100 today and wish to invest it for three years for an interest rate of 10%, how much
will you have earned by the end of the third year?
The formula for calculating future value is:
• 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.

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Financial feasibility of projects
Generally, projects are undertaken for two primary purposes:
1. To increase the revenue
2.T o reduce the operating cost by automating some workflows

However, at times projects are also undertaken for regulatory compliance and performance
improvement purposes.

The financial feasibility study is performed by product owners to determine how profitable the project
would be and the analysis is reviewed by project sponsors. To forecast the financial feasibility of a
project the following metrics are widely used:

• Return of Investment (ROI)

• Net Present Value (NPV)
• Internal Rate of Return (IRR)
• Payback Period

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Return On Investment
Return on Investment (ROI) is a performance measure
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

minimum acceptable rate of ROI for projects.
ROI is calculated using the formula:

The higher ROI yields better results for an organization.

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Net Present Value
Net Present Value (NPV) is a method of calculating the expected net monetary gain or loss from a
project by discounting all the expected future cash inflows and outflows to the present value.
Points to remember:
• NPV 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’.
• •NPV is calculated using the formula:

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 Net Present Value - Example

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?

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Net Present Value - Example
• The cash flow for each year is
computed by subtracting Cost from
Revenue.
• The resultant value is then used to
compute the NPV.
• Note that 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.

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Internal Rate of Return
Internal Rate of Return (IRR) shows the interest rate at which the NPV becomes zero.
The IRR is established by a company as the minimum threshold a project must exceed to be considered viable.

Usually this threshold is the point at which equity holders would receive a higher return than if they allowed the
investment to merely collect interest.
IRR is calculated using the formula:

Where,
ra= Lower discount rate chosen
rb= Higher discount rate chosen
Na = NPV at ra
Nb= NPV at rb

Projects with higher IRR are preferred by organizations.

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Internal Rate of Return Example
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.

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Pay Back 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:
• The calculations and interpretations are straightforward.
• The payback period measures the amount and duration of financial risk taken by the organization.

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Prioritization
The key purpose of prioritization is to identify the high value features and get them
delivered on priority. This helps organizations provide maximum benefits to the customer.
Prioritization also helps to:
• Decide the order of requirements for the team to work on.
• Adjust the scope to meet budget or timeline objectives while retaining a useful set of
functionality (Minimum Marketable Release).
• Decide the release planning, iteration planning, and insertion of new requirements.
• Determine the low priority (non-value adding) tasks, to avoid working on them.

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Factors in Prioritization
The factors to be considered while prioritizing requirements are as follows:

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Agile Customer Value Prioritization
The product owner should continuously assess the product backlog and prioritize the requirements
based on their customer value.
Determining customer value involves activities such as:
• collaborating with customers,
• creating focus groups, and
• reducing technical debt.

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Agile Customer Value Prioritization
• While focusing on the customer-value prioritization, the following aspects must to be factored:

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 Prioritization Techniques
The product owner, business stakeholders, and the team must have a clear understanding of the
techniques to be implemented and the rationale associated with each priority.

Also, care needs to be taken to ensure that the definition of priorities does not change or get
diluted over the course of the project.

There are three prioritization techniques that can be applied within Agile:

1.MoSCoW
2.Kano Model
3.Relative Weighting
The term ‘Pruning the Backlog’ refers to the process of
continuously prioritizing the backlog.

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 Prioritization Techniques- MoSCoW
Dynamic Systems Development Method (DSDM), an Agile Methodology, recommends prioritization
of requirements using the MoSCoW technique.

Under this technique, the requirements are prioritized based on the following:
• Must—These requirements are mandatory
• Should—These requirements are highly desirable, though not mandatory
• Could—These requirements are nice to have
• Won’t—One should not work on these requirements at this point in time

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MoSCoW Technique—Example
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:

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?

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MoSCoW Technique—Example

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Prioritization Techniques – Kano Model
Kano Model was developed by Professor Noriaki Kano.
This model strives to fulfil requirements and ensure
customer satisfaction.
Under this technique, the requirements are prioritized
based on the following:
• Basic Needs
• Performance Needs
• Excitement Needs

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Kano Model - Categories
The four categories of the Kano Model are as follows:

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Kano Model - Example
A big mobile handset company is planning to launch a new version of their mobile. Ray, 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?

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Kano Model - Example
The requirements can be differentiated using Kano Analysis as follows:

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Prioritization Techniques—Relative Weighting
Relative Weighting Technique was created by Karl Wiegers.
This technique is based on the premise that the features that provide the highest benefits after
adjustment for costs, risks, and penalties, should have the highest priority.

Key aspects of this techniques are:

• A feature’s priority is directly proportional to the value it provides, and inversely proportional to
its cost and the technical risk associated with its implementation.

• Each category uses a scale of 1 –9.

• Benefits reflect the value a feature will provide, while penalties reflect the negative effect a
customer will experience if the feature is not included.

Further, risks reflect the challenges of implementing the feature, and costs reflect the actual costs
of implementing the feature.

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Relative Weighting—Example
An example of relative weighting is given below:

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.

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Risk management in Agile
Risks are proactively managed in Agile projects by:
• computing the Expected Monetary Value (EMV) of the negative risks.
• ensuring that the response strategy for risks with higher EMV are prioritized early in the
project’s iterations.

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%)

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Risk Adjusted Product Backlog
Risk involved with a feature is an important factor in
prioritizing the product backlog. Product backlog is
continually reviewed and adjusted. The customer,
along with an analyst, and other team members,
prune the backlog.
While pruning, impact (risk) analysis is the key.
Further:
• items are broken down,
• analyzed for their interdependencies,
• shifted up or down in priority,
• re-estimated,
• removed, and
• reallocated to iterations or releases.
Analyzing the impact of changing requirements should
be a routine among successful Agile teams.

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

Some of the non-functional requirements are global in nature and can be applied across the all
requirements, while some are specific to individual requirements.
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Prioritization of Non-Functional Requirements
Non-functional requirements should also be
prioritized in-line with other functional
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 lifecycle.
• 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.

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Prioritization of Non-Functional Requirements

Addressing these requirements helps in improving the quality and value of deliverables.
If these requirements are missed or discovered later, it becomes difficult to address them.

The Product Owner needs to ensure that the specialists in these fields are involved while
envisioning the product and capturing requirements.

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Quiz 1: Which of the following is a useful technique for pruning
a backlog

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Quiz 2: Project A has NPV of 330K, Project B has NPV of 300K,
and Project C has NPV of 280. Which of these projects would
you select

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Quiz 3: Which of the following factors is not used in
prioritization?

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Quiz 4: Which Prioritizing technique considers both, the
benefits of the presence of a feature and the negative impact
of its absence

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Quiz 5: In the Kano Model, which of the following categories
would a new feature such as a 1,000 hour battery life on a
cell phone fall into?

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Quiz 6: How Do Agile Projects manage Risks

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Let us summarize the topics covered in this
lesson:
• Present value is the amount of money today, or the current value of a future cash flow. Future value is
the amount of money at some future time period.
• The thumb rule for decisions is to select the project with higher ROI, IRR, NPV, but lower payback
period.
• Factors to be considered for prioritization are the financial value of the features, cost of developing
the new features, amount and significance of learning and new knowledge gained while developing
the features, and amount of risk removed by developing the features.
• While planning for an iteration, ‘Must’ requirements should be prioritized followed by the ‘Should’
and ‘Could’ requirements (MoSCoW).
• Requirements falling in the Threshold category should be picked up while following Kano Model.
• Risks in Agile projects are managed by associating user stories with Risks and ensuring that risks are
prioritized early in the project’s iterations.
• Non-functional requirements should be actively identified and prioritized to avoid project failures.

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