How to measure the ROI of agile projects
Calculating return on investment should include value and impact as well as financial gain. Agile projects can deliver that before the project is over
Calculating the return on investment (ROI) of a project would seem to be a straightforward thing to do – you take the income or profit from the project, whether actual or projected, and divide it by the costs. But some project management experts go further than that.
Agile projects is an approach which is broken down into more manageable sections and helps determine the overall value throughout the project, in addition to traditional methods which calculate financial gain at the end.
Dr David Rico, an agile technical leader who has handled almost $2bn worth of agile projects - including for the US government - carried out a meta study in 2009 of 29 projects. Rico found that the ROI for agile methods was four times more expensive than traditional methods, but two times lower than inexpensive ones, making it tricky to determine the best agile and traditional methods.
However, Rico pointed out a key flaw in the simple view of ROI, that it is difficult to compare “traditional methods optimised for productivity and quality, to agile methods optimised for customer satisfaction, project success and risk reduction.”
Simply put, both agile and traditional methods can deliver comparable ROI but we should not necessarily view ROI solely in terms of financial return.
Indeed, this is a core principle of the agile’s founding document - the Agile Manifesto - which emerged from a meeting of like-minded software developers back in 2001 who were looking for an alternative to “documentation driven and heavyweight software development processes.”
The first of its 12 key principles reads: “Our highest priority is to satisfy the customer
through early and continuous delivery of valuable software.”
It is perhaps value rather than financial return that should be taken from agile.
Dr Nicholas Dacre is associate professor of project management at the University of Southampton and director of the Advanced Project Management (APM) research centre. During the coronavirus pandemic, he worked with a UK government department on a major project and the speed of positive change was deemed most important.
“Covid-19 spurred on new ways of thinking in terms of project management,” he says. “Based on decades of waterfall project management approaches, it was deemed that the speed and efficiency of traditional project management at the time of a global crisis was completely unsuitable. One of the advantages of using an agile approach was to reduce the speed at which they could affect positive change.
“If that department hadn’t transitioned from traditional project management approaches to more agile processes and ways of thinking, ultimately the project would not have been delivered on time to have any positive impact.”
Andrew Taylor, chief technology officer at agile consultancy Q5 Partners, says there is no magic formula for measuring ROI. For some companies the measurement could be profit, and for others it could be the speed of delivering a product or new features.
“Fundamentally, we talk about the value you are trying to deliver in your context,” Taylor says. “What are the outcomes? If I am a CEO looking from the top down, I might want to talk about the impact on the bottom line, how quickly we can release a new product or cut costs in a particular area.
“The traditional measures of the success of a project of just being about ‘on time, on scope and on budget’ are dead. I am not solely interested in that anymore, those are just outputs of work. I am focused primarily on the value and outcomes that are being realised and far less about project delivery deadlines,” he says.
How is it achieved?
Ari Ghosh, head of Q5’s agile coaching practice, says, “one important measure we talk about are the OKRs – the objectives and key results.
“The objective could be, say, that you want to be the most successful franchise operation in the world; a key result, and there tend to be three to five of these, could be 15% growth in franchise locations in the EMEA region in a year.
“You track those and see whether ROI is coming in, building towards the overall outcome you are looking to deliver,” Ghosh says.
OKRs were popularised by Intel’s Andy Grove in the 1970s.
In the seminal book Measure What Matters by John Doerr - who worked at Intel with Grove and introduced OKRs to Google - the search giant’s co-founder Larry Page says: “OKRs have helped lead us to 10x growth, many times over. They’ve helped make our crazily bold mission of ‘organising the world’s information’ perhaps even achievable. They’ve kept me and the rest of the company on time and on track when it mattered the most.”
Q5’s Taylor says one approach is to create a whole hierarchy of “mini OKRs” and make individual teams accountable for their performance and their outcomes. Then resources would be reallocated between teams over time, and measuring ROI and reacting to variances can happen much faster.
“Instead of having a quarterly or annual report where you say you have missed a target by 10-20%, you are constantly tracking and making micro-adjustments. You create visibility and track the value measure you have set, and can literally see how that percolates up from the organisation, and you can then align and hold individual teams to be more accountable.
“Investor expectations are changing. It is not about the annual report anymore. They want feedback much earlier and want to see what is happening on a monthly basis,” Ghosh adds.
Though, setting OKRs should not be just about driving change.
Taylor, who worked with a large telecoms organisation, says: “One of their strategic objectives is obviously to keep the network running. There is a natural inclination to set strategic objectives and measure outcomes focused on change and the shiny new thing. But when it works most powerfully it encompasses all of the valuable work of the organisation and that includes sustaining the business.”
ROI also has to be seen against a backdrop of a high level of megaprojects which have failed to meet their objectives, says Dacre. APM research among more than 850 project management professionals shows that just 22% of projects are wholly successful yet 76% of project professionals state that agile project management has had a positive effect.
Some argue that the need to have an agile team leader or coach reduces the ROI on projects but Dacre disagrees.
“A surprisingly large number of organisations have less than five years’ experience in agile processes,” he says. “If you are calculating from a six-month perspective, there will be disruption in terms of upskilling and adopting new processes. I would argue that in the medium-to long-term you have your benefits and your ROI. You add value to the project at a quicker pace.”
Evaluating ROI is challenging for any project, whether tackled by traditional or agile methods. The answer is not to focus too closely on financial returns, although agile can clearly compete and beat traditional methods in many projects.
To achieve success, organisations must identify the value that matters most to them and adjust accordingly. In a post-Covid era, this is more important than ever.
Evaluating the potential ROI of an agile project
Dr Nicholas Dacre, associate professor of project management at the University of Southampton, says that the agile methodology has seven key benefits and these should be considered when evaluating the potential ROI of a project.
- Has a notable effect on the quality of the outcome of a project.
- Enhances the ability to manage priorities as external factors change.
- Shorter delivery times.
- Improved customer satisfaction as ROI is seen much sooner when delivering a minimum viable product.
- Reduces risk in changing environments.
- Increase project visibility as stakeholders feel they are part of a project.
- Improve team morale and productivity.