Calculating Business Value
Calculating business value and using that insight to prioritize the Product Backlog is one of the most important things an Product Owner can do to drive profits and achieve a competitive advantage using Scrum.
Upon completion you will:
- Be able to explain the role business value plays in Scrum
- Understand five ways to calculate business value
- Know the math behind Net Present Value
- Learn the difference between urgent vs. important priorities.
- Know how to prioritize your Product Backlog to maximize revenue
- Qualify for Scrum Alliance SEUs and PMI PDUs. See FAQ for details
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Business Value Overview:
The Scrum framework helps you to deliver product features independently, allowing you to focus on delivering high value functionality first. Time and again, we see that 80% of a product’s value resides in roughly 20% of its features and that 65% of all features are never or rarely used. By using business value as the lens to order the Product Backlog, the Product Owner can get these features into customer’s hands faster, receive feedback, and maybe discover new high-value features. However, too often it is also one of the Scrum practices that gets glossed over or done in an ad hoc way.
Teams that overlook a disciplined approach to business value are leaving money on the table. Regardless of the Estimation technique used, business value should be an explicit consideration and assigned in consistent way. This will eliminate most disagreements about strategic decisions that rely on top-down decrees, intuition or luck. When business value is transparent, both Leadership and Team members can make informed decisions about how best to make the project a commercial success.
This online course details how Scrum Inc. calculates Business Value and uses it to inform our fiscal and strategic goals. Our quick but quantitative method will give you the practical knowledge you need to maximize the business value of your backlog.
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Sources of Business Value
Business value exists at the intersection of what the market wants, what the Team can actually implement, and what it is passionate about. At Scrum Inc., we generally think of business value as coming from three sources:
- The source most people think of when assessing business value is economic value. How many units can be sold? How much can be charged per unit? And how can costs be lowered? These are important fundamental questions that need to be answered before you determine whether or not a product is worth creating. However, market value is not the only thing to look at.
- Another important source of business value is the mitigation of risk. Before launching a new project, a Product Owner should develop a number of hypotheses about the market and then test them systematically. Activities that test these hypotheses generate value to the project and company. This is especially important if you are in the business of innovating.
- Testing technical assumptions also creates business value. Does the organization really have all the knowledge and tools necessary to deliver the product? If not, is the project still lucrative enough to justify procuring the necessities to make it a reality?
And finally when assessing business value, the Product Owner should determine if completing a backlog item would expand the company’s capabilities. Will the staff develop new skills allowing them to expand the company’s product line? Will leaders improve internal processes that will make other parts of the company more effective? Will refactoring a section of code eliminate a large share of the bugs that consume valuable team energy and free them up for value creating development? All these are examples of business value creation through capability building.
Business Value Appears at the Feature Level
People often ask us at what level of the backlog should they estimate business value. Estimate at too detailed a level and you will need to perform thousands of largely meaningless calculations. Estimate at too high of a level and you may miss important details. While the exact answer depends on a team’s unique situation, in general we find that business value is most effectively estimated at the Epic level, which generally maps to product features that can be defined completely and delivered to customers independently.
The Product Owner needs to determine how much effort an Epic will take and whether the organization has the resources to complete the project. We prioritize the backlog by return on investment (ROI), which is the business value we get in exchange for the effort/money invested to accomplish it. In Scrum, we often use the story points of an Epic as the measure of investment. Coordination with the finance department can also help this process substantially as they probably already have a defined method for evaluating ROI.
Ways to Estimate Business Value
There are a number of ways that Product Owners can estimate business value, involving different trade offs between speed and quantitative rigor. It is the up to the Product Owner to decide which method is best suited for any given situation.
Commonly used methods include (from fastest to most quantitative):
- Bubble Sort
- Planning Poker
- Break Even Analysis
- Return on Investment (ROI)
- Net Present Value (NPV)
Business value doesn’t have to be purely economic. Often a company is hoping to make an impact, or deliver on a social mission. The ability to accomplish these goals can also be defined as creating business value. Depending on what your company is hoping to accomplish one technique may be more helpful than another.