Finance and Agile

A “Potential future post” based on how we evaluate ROI in IT teams.

Based on Liam’s feedback “I preferred it without the NPV discussion. The uncertainty in ROI calculations makes NPV less important. Its hard enough to get sponsors to think about the return side at all.”

This was the content that I added, then removed:

Instead we should simply be comparing our SMART goal’s agreed measurable metrics (their return) over a period of time to the cost of the delivery and ongoing operational costs, whilst ensuring we respect the _time value of money_.

To do this, we want to calculate the Net Present Value of our project over its predicted period. We will use our goal’s agreed metric as the income input, and the total cost of the delivery per period as the expenses. You’ll need to have an idea of your company’s cost of finance - this may be the rate of return shareholders expect on their investment, or the overall cost of finance via borrowing your company incurs. The organization’s CFO should know what the number is.

If our calculation works out to a positive number, then we have a net positive investment if we achieve our goal.

If we want additional perspective on our investment, such as viewing the profitability of it, as opposed to the value, we could also look at calculating its Internal Rate Of Return

This may all sound a little accounting-heavy, but it is an important part of how a business will evaluate whether to proceed with a financial investment, or how it will select between a set of investments. It is based on the fact that a dollar today is worth more than a dollar in a year’s time. If you want to learn more about business finance without having to become an accountant or get an MBA, I highly recommend the book Financial Intelligence by Karen Berman and Joe Knight.

Even if our calculations above indicate positive results, we need to take into account the risk of our initiative. How postive do our numbers need to be? It is likely that they need to be higher than you think.