Business Justification Techniques in Scrum

 

All projects are usually required to undertake a business justification process, and Scrum is not an exception. This practice is essential because it helps the business understand its options pertaining to change initiatives, new products or services and providing justification for undertaking a new project. The business justification process is also an enabler for the Product Owner to start the creation of the Prioritized Product Backlog for meeting the expectations of executives and shareholders.

The Importance of Business Justification

It is important to conduct the business justification process because the reasons why a project should be undertaken must be clear and factual. The justification for the project must be established prior to approval. It must be demonstrated that the project is viable and the justification process is the driver for all project evaluations. A business should never expend large amounts of funding at the beginning stage or for the project continued until the justification process has been conducted. To be clear, the business justification process should be implemented on a continuous basis; at the beginning, at established intervals throughout the project lifecycle and whenever a risk or issue presents itself. Table 1 outlines the factors that drive the business justification process.

Table 1: Business Justification Factors

The Business Justification Process

This justification process commences prior to the initiation of a project and is consistently validated throughout the lifecycle. Business justification is determined by means of the following three steps:

1. Present and Evaluate a Business Case - A project is generally evaluated and approved by the Product Owner. After approval, the project is documented and presented as a business case. Subsequently, the Product Owner creates a Project Vision Statement and obtains approval from executives and/or the project or program management board.

2. Justification of Continuous Value - After decision makers have approved the Project Vision Statement, it is baselined and delineates the business justification. The business rationalization is continuously validated during the entire project execution stage and at predefined milestones. During the project, the Product Owner should regularly make certain that the Project Vision Statement is updated with the appropriate information to reliably empower decision makers to continue to make up-to-date decisions.

3. Benefits Realization Confirmation – The Product Owner has the responsibility to confirm the realization of customer benefits throughout the project and when the User Stories in the Prioritized Product Backlog have been developed and accepted.

Business Justification Contributors

The Product Owner is held being accountable for directing the activities that substantiate and keep track of business value for their assigned projects, programs or portfolios. In addition to the Product Owner, there are additional parties that provide contributions to the fulfillment of business justification activities such as:

• The Sponsor – provides the required funding for the project and monitors the project to validate the realization of its benefits

• Customers and Users – participates in defining the prioritized list of requirements and User Stories in the Prioritized Product Backlog. They also review product deliverables during each Sprint and Release and provide confirmation that benefits have been realized.

• The Scrum Guidance Body – possibly provide recommendations and guidelines that pertain to business justification techniques and the confirmation of benefits realization.

• The Scrum Master – facilitates the development of the project’s deliverables, manages risks and changes, and removes impediments. Collaborates with the Scrum Team, Product Owner and stakeholders to ensure that project benefits are realized.

• The Scrum Team – completes the deliverables for the project and contributes to the realization of business value.

Business Justification Calculations

There are many tools that can be used to evaluate and review projects during the business justification process. We focus our discussion on calculating the Project Value Estimation. Expected business value can be estimated using several methods such as Return on Investment (ROI), Net Present Value (NPV) and the Internal Rate of Return (IRR). Following is a synopsis of these three methods.

1. Return on Investment (ROI) – This calculation is used to justify a project by assessing the expected net income to be returned from a project after deducting the costs and then dividing by the total project cost. Using ROI, project value is calculated with the following formula:

1. ROI = (Project Revenue – Project Cost)/Project Cost
2. Example: With a project cost $2,000,000 to develop, expected financial benefits estimated at $5,000,000, ROI is determined as follows:
3. ROI = ($5,000,000 - $2,000,000) / $2,000,000) = 1.5
4. ROI is 1.5 times the initial investment (or 150%)

2. Net Present Value (NPV) – This calculation is used to figure out the current net value of future benefits with a presumed interest rate. NPV is the total expected income from a project minus the total cost of the project, considering the time-value of money.
   1. We are trying to decide between two projects:
   2. Project 1 has an NPV of $8,000 and its life cycle is 5 years
   3. Project 2 has a NPV of $5,000 and its life cycle is 2 years
   4. Project 1 has a higher NPV and we are considering the present value and NOT the future value.

3. Internal Rate of Return (IRR) – This calculation is a discount rate on the investment where the present value of cash inflows is made equivalent to the present value of cash outflows for determining a project’s rate of return.
   1. We are trying to decide between two projects to take on.
   2. Project 3 has an IRR of 5% and will be done in 4 years
   3. Project 4 has an IRR of 15% and will be done in 2 years
   4. Project 4 is the right one to select because it has a higher IRR and the duration is not being considered because time has already been considered

Keywords: justification, scrum, business

References:

Investopedia. (n.d.). Payback Rule. Retrieved from http://www.investopedia.com/walkthrough/corporate-finance/4/npv-irr/payback-rule.aspx

SCRUMstudy. (2016). A Guide to the Scrum Body of Knowledge (SBOK^TM Guide.), 3^rd Edition