What is a ROI Calculation and how is it used in Scrum Projects? Is the calculation based on customer satisfaction? Return on Investment (ROI) is a Measurement that is essential to Stakeholders. Stakeholders take Risks by investing in a Project and want to ensure they get their money back. Ideally they will accomplish added Growth and Revenue. Return on Investment typically has a different time horizon from the Project that Delivers the Product or Service.

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Lets consider a new Product that has been Developed. It is expected to bring in an additional $5 million over the next 2 years. However the Project is complete before any of that new revenue has been realised. Measurement of that Benefit is Done as part of Program or Portfolio Management, which extends beyond the Life of the Project.

Not all Projects do increase Revenue. Consider an Organization that must comply with new legislation. The development is not to increase income, however rather to avoid non-compliance and the fines and levies that may result. The success of such Projects is non-negotiable.

When to Apply a ROI Calculation

There are different cases where ROI can be used, such as:-.

• comparing the ROI of a Scrum Project or another flavour of Agile versus a Traditional Project in order to choose which Framework to select (strategy).
• utilizing ROI to Measure when the specified Benefits for a Product are reached (Benefits Management).
• utilizing ROI to determine whether the Scrum is Delivering Value and delivering a product to customer satisfaction with the required Velocity (Project Management).

We will just discuss the last case. It is important to define which Investment you are attempting to validate with your ROI calculation. This will help to avoid confusion.

What is the ROI Formula?

ROI is one of many Profitability Ratios applied by accounting professionals, and the formula is very simple.

Return on Investment = (Total Revenue – Total Costs)/ Total Costs.

The trick remains in what comprises “Total Revenue” and “Total Costs”, and in what context.

For example, Bill decides to Invest in a new Company that is to be listed next week. The share offering is an initial cost of £1 per share, and he buys 1 000 shares. Four weeks later, the share price is £1.50. Bill calculates his ROI thus:-

ROI = (₤ 1 500 – ₤ 1 000)/ ₤ 1 000.

which offers an ROI of 0.5 or 50% (Of course, there is no ROI until the shares are sold).

ROI Calculation: Finding the ROI of a Project.

In a Traditional Project, the Development Lifecycle restricts the capability to determine ROI up until the end of the Project. This is because the Stakeholders are only involved in the Project at the start. This is when their Requirements are defined. They are next involved at the end of the project. This is when the completed system is available for User Testing.

In a Scrum Project, since the Development is completed in Iterations, the Stakeholders are involved throughout the Project. ROI can be evaluated throughout the Project. At the end of every Iteration, a new version of the Product is provided to the Stakeholders. The stakeholders examine and Test the product increment. The ROI can be computed at this stage.

The Product Owner is accountable for calculating ROI and any other Project Metrics. This is because they are Tasked with ensuring that the Scrum Delivers the anticipated Business Value.

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ROI Calculation: What Data is Required?

In an Agile Project, ROI can be used to Demonstrate the Ratio of Project Revenue versus Project Costs to Date. The challenge is that, unlike Traditional Projects, Total Revenue and Project Costs are inappropriate Measures in Scrum. This is because the Project is Time-Boxed and costs are fixed. The one thing that is not fixed is the Scope. Therefore to get a meaningful ROI, we require to understand just how much of the Product we have actually Delivered. The data we require is Estimated at the start of a Sprint during the Sprint Planning Meeting. This is based upon the individual complexity of each User Story assigned to the Sprint by the Scrum Team.

Normally a Points score is attributed to each User Story by the Team, although some Teams use different Value Systems. The number of Points indicate the Complexity of the Story, rather than the Estimated Effort. This is because an experienced Team member will take less time than a junior Developer/Team member. The sum of all the Points of all the User Stories for a Sprint is an important metric. This metric is known as the Velocity. The actual time taken to complete the Sprint is also determined. This is a Fixed Value expressed as a number of weeks. The number of weeks should be the same for every Sprint,. This is in order for the Velocity for each Sprint to be consistent.

Scrum Works with Risk and Uncertainty, which lowers with each Sprint. The Estimation of Velocity is least reliable for the very first Sprint, but will improve as the Project progresses. We can determine ROI for the Sprint and ROI for the Scrum to date using this formula:-.

ROI=( Velocity – Points Completed)/ Points Completed.

where “Points Completed” is the Sum of the Points for User Stories that are “Done”, or finished and Meeting all the User Acceptance Criteria. :-.

ROI for the Sprint=( 150 – 100)/ 100.

or 50%.

where Velocity = 150 and Points finished = 100.

The ROI in this case can never be higher than 1. This is due to the fact that the completed Sprint can only Deliver a Value less or equivalent to the total of Points in the Sprint Backlog, which is the Velocity.

We can also calculate an ROI for the Scrum as a whole. In the same way, the Cumulative Velocity for the Scrum is used (Velocity of Sprint 1 + Velocity of Sprint 2 + Velocity of Sprint 3 etc), or the Estimated Total Velocity (Velocity of Sprint 1 X No. This ROI might likewise be considered to be the confidence level in the Scrum, which ought to rise as each Sprint is completed.

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Reporting on the ROI.

An appropriate Meeting for reporting on the ROI is the Sprint Review Meeting. In this meeting the ROI for the Sprint and the ROI for the Scrum to date can both be reported on. It can likewise be used in the Sprint Retrospective to evaluate quickly whether the Scrum Team (Agile Scrum Master, Scrum Product Owner, and Scrum Development Team) is improving or preserving the pace for the Delivery of Value.

This is only one method to compute ROI in a Scrum Project. You could likewise Work with time, using the Time Estimates Done at Task Level (Tasks are the activities needed to finish a User Story). Together with other indicators of Project Success, such as the Burndown Chart, the Risk Reduction Chart and the Earned Value. There are lots of methods of Demonstrating Value Delivered to the Stakeholders. The Scrum Product Owner can likewise utilize these Metrics as an early warning system that the Project is Delivering below expectations and take corrective action.