Business Justification in Scrum

September 1, 2020
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For an organization, it is necessary to perform a proper business justification and create a viable Project Vision Statement prior to initiate and continue with any project. A well-structured Project Vision Statement explains the business need the project is intended to meet rather than how it will be met. It is possible that the current understanding of the project is based on assumptions that may change as the project progresses, so it is important that the project vision is flexible enough to accommodate these changes. The project vision should focus on the problem rather than the solution.

This helps key decision makers to understand the business need for a change and the justification for initiating and moving forward with a project. It also helps the Product Owner to create a Prioritized Product Backlog with the business expectations of sponsors, users, and other key stakeholder(s).

There are various techniques used to determine and evaluate business justification. It is not necessary, or even recommended, to use every available technique for every project. Few techniques may not be appropriate depending on the project and its specific needs. The techniques may be used to assess projects individually and to compare the expected value of multiple projects. Product Owner of a project, however, is responsible for performing the project activities to develop, track, and verify business justification.

The business value of a project can be estimated using various methods such as Return on Investment (ROI), Net Present Value (NPV), and Internal Rate of Return (IRR). Let us discuss the these methods in detail.

  1. Return on Investment (ROI)

Return on Investment (ROI) can be used to assess the expected net income from a project. It is calculated by deducting the expected costs or investment of a project from its expected revenue and then dividing this (net profit) by the expected costs again in order to get a return rate. Other factors such as inflation and interest rates on borrowed money may be factored into ROI calculations.

Here is the ROI formula:

ROI = (Project Revenue – Project Cost) / Project Cost

Frequent product or service increments, is a key foundation of Scrum that allows earlier verification of ROI. This aids in assessing the justification of continuous value.

  1. Net Present Value (NPV)

Net Present Value (NPV) is a method used to determine the current net value of a future financial benefit, given an assumed inflation or interest rate. In other words, NPV is the total expected income or revenue from a project, minus the total expected cost of the project, taking into account the time-value of money.

  1. Internal Rate of Return (IRR)

Internal Rate of Return (IRR) is a discount rate on an investment in which the present value of cash inflows is made equal to the present value of cash outflows for assessing a project’s rate of return. When comparing projects, one with a higher IRR is typically better.

Though IRR is not used to justify projects as often as some other techniques, such as NPV, it is an important concept to know.

 Therefore, it is not only important to assess the viability and achievability of a project before initiating a project but also to verify the business justification throughout the project’s lifecycle to decide on continuation of the project.

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