Lean Software Development - Economics of Speed

Lean/Agile/Kanban – the Economics of Speed

Colm O’hEocha

AgileInnova>on

Slow Down to Speed Up

1 Copyright © 2012 AgileInnova>on

London Lean Kanban Day 16th March 2013

What is said… …What is heard

Copyright © 2012 AgileInnova>on 2

What is said… …What is heard

Hey Boss – this Lean stuff sounds great! Lean – sounds like it could help cut costs

Its all about ‘Con>nuous Improvement’ Oh-‐Oh – I think he means ‘don’t expect any improvements soon’…

…and Respect for People …code for ‘team want to get paid more’…

Limi>ng WIP and U>lisa>on… ..and they want to do less work…

…visualizing the work,… …now that could be embarrassing…

…and itera>ons of learning …they want permission to mess up!

Two Ways to Reduce Waste

Batch Up (Economies of Scale) •  Big

•  Features •  Releases •  Projects •  Commitments

•  Efficiency •  Maximise U>lisa>on •  Increase Produc>vity •  Reduce Costs

•  Local Op>misa>on

Speed Up (Economies of Speed) •  Small

•  Features •  Releases •  Investments •  Risks

•  Efficacy •  Maximise Feedback •  Improve Outcomes •  Reduce Cycle Time

•  Global Op>misa>on 3

Copyright © 2012 AgileInnova>on

Sample Project


Commercial So`ware Product – API Access Module for Travel Booking System 8 people @ €110K per year, 6 months development

Return of €210K Immediately on Delivery (month 6)

Monthly Transac>on Revenue builds from €5K to€31K – growth ends month 14 Maintenance & Support: 20% of transac>on revenue

Cash Discount Rate: 6% p.a. 4

Travel Booking Backend System

Airline Mobile Site

Airline Booking Partners

Airline Internal Systems

Vendor Supplied UI API

Investment Period

Payback Period

Profit Period

Investment Curve

Max. Cash Consumed

Self-‐Funding Point

Break-‐Even Point

Cash

Time


Cumulated Profits

NPV: Net Present Value – amount we would gain/loose (in todays money) by inves?ng in the project

Max Cash Invested

Pay-‐back Month

RoI 3 yrs

NPV

Single Release

Sample Project


Team%Size 9

Average%Fully%Loaded%Salary 110000

Annual%Cost%of%Capital 6%

Monthly%rate%of%transaction%growth%(8%months) 30%

Maintenance%Costs%%%of%Transaction%Revenue 10%

Year

Month 1 2 3 4 5 6 7 8 9 10 11 12

CostsDevelopment%Costs €82,500 €82,500 €82,500 €82,500 €82,500 €82,500

Maintenance/Support%Costs €0 €0 €0 €500 €650 €1,245 €1,719 €2,234 €2,904 €3,776 €4,908 €6,381

Adjustment%for%Reduced%Variability%T%50%%Less%Change%Mgt

Adjt%for%Reduced%Demand%T%30%%Dev%and%Maintenance%Costs T€24,750 T€24,750 T€24,750 T€24,900 T€24,945 T€25,124 T€516 T€670 T€871 T€1,133 T€1,472 T€1,914

Adjustment%for%Reduced%Risk%T%50%%Chance%Technology%Failure €0

Adjustment%for%Better%Quality%T%10%%less%development%cost T€8,250 T€8,250 T€8,250 T€8,250 T€8,250 T€8,250

Adjustment%for%Less%Overhead%T%5%%Development%Costs%Saved

Costs%Incurred €49,500 €49,500 €49,500 €49,850 €49,955 €50,372 €1,203 €1,564 €2,033 €2,643 €3,436 €4,466

Cumulative,Costs,Incurred €49,500 €99,000 €148,500 €198,350 €248,305 €298,677 €299,879 €301,443 €303,476 €306,119 €309,555 €314,021Costs%Incurred €49,254 €49,009 €48,765 €48,865 €48,725 €48,886 €1,162 €1,503 €1,944 €2,514 €3,252 €4,207Cumulative,Costs,Incurred €49,254 €98,262 €147,027 €195,893 €244,617 €293,504 €294,665 €296,168 €298,112 €300,626 €303,878 €308,085

BenefitsRevenue%on%Feature%Delivery €100,000 €80,000 €30,000

Revenue%on%Transaction%fees €5,000 €6,500 €12,450 €17,185 €22,341 €29,043 €37,755 €49,082 €63,807

Adjustment%for%Prioritised%Delivery

Adjustment%for%Innovation%10%%more%Benefit

Adjustment%for%Motivation%T%10%%more%Value%by%the%Team

Benefits%Realised €0 €0 €0 €105,000 €6,500 €92,450 €47,185 €22,341 €29,043 €37,755 €49,082 €63,807

Cumulative,Benefits,Realised €0 €0 €0 €105,000 €111,500 €203,950 €251,135 €273,476 €302,518 €340,274 €389,356 €453,162

Benefits%Realised €0 €0 €0 €102,926 €6,340 €89,724 €45,566 €21,467 €27,768 €35,919 €46,462 €60,100

Cumulative,Benefits,Realised €0 €0 €0 €102,926 €109,266 €198,990 €244,556 €266,023 €293,791 €329,709 €376,171 €436,271

Net%Benefit%Flow T€49,500 T€49,500 T€49,500 €55,150 T€43,455 €42,079 €45,982 €20,777 €27,010 €35,113 €45,646 €59,340

Cumulative%Net%Benefit%Flow T€49,500 T€99,000 T€148,500 T€93,350 T€136,805 T€94,727 T€48,744 T€27,968 T€958 €34,154 €79,801 €139,141

Net%Benefit%Flow%(Discounted%Cash%Flow) T€49,254 T€49,009 T€48,765 €54,061 T€42,385 €40,838 €44,404 €19,964 €25,824 €33,404 €43,209 €55,893

Cumulative%Net%Benefit%Flow%(Rolling%NPV) T€49,254 T€98,262 T€147,027 T€92,967 T€135,351 T€94,513 T€50,109 T€30,145 T€4,321 €29,083 €72,293 €128,186

Max%Invested T€148,500

Rolling%RoI T100% T100% T100% T63% T92% T64% T33% T19% T1% 23% 54% 94%

10 11 12

Payback%Month 10

3%Year%RoI 0%

NPV €0

%Discounted

1

Not%Discounted

Discounted

Not%Discounted

Discounted

Not%Discounted

-‐€600,000

-‐€400,000

-‐€200,000

€0

€200,000

€400,000

€600,000

€800,000

€1,000,000

€1,200,000

1 7 13 19 25 31

Single Release

Sample Project -‐ the Business Case


Self-‐Funding Point

Break-‐Even Point

Max Cash Invested

7

Max Cash Invested

Pay-‐back Month

RoI 3 yrs

NPV

Plan-‐Driven 440K 20 95% 347K

FP/FS Single Delivery a`er 6 months


Earlier Benefit Accumula>on

REDUCE COST

INCREASE BENEFIT

Improved Quality

Improved Business Agility

More Mo>va>on

Reduced Risk

More Innova>on

Less Management Overhead

Less ‘Just In Case’ Demand

ECONOMIES OF SPEED

€ Earlier Benefit Accumula>on €

€ Improved Quality €

Reduced Risk

€ Less ‘Just In Case’ Demand €

€0

€10,000

€20,000

€30,000

€40,000

€50,000

€60,000

1 7 13 19 25 31

Extra Sales Original Xac>on Revenue

Advantage of Early Delivery 14 month Product Growth Phase


GeQng to Market 2 months

Earlier ≈ +€0.7M (87%)

€ Earlier Benefit Accumula>on €

Sample Project


€ Earlier Benefit Accumula>on € Max Cash Invested

Pay-‐back Month

RoI 3 yrs

NPV


Increased Sales

307K 17 286% 753K

-‐€600,000

-‐€400,000

-‐€200,000

€0

€200,000

€400,000

€600,000

€800,000

€1,000,000

€1,200,000

1 7 13 19 25 31

Single Delivery Extra Sales

Earlier Delivery to Market –Months 4, 5 and 6; Stage

Payments & Increased Transac>on Revenue

Generate Value 36% Rarely used

19%

Never used 45%

Standish Group CHAOS Study




“Build an API that exposes the booking engine func>onality to other Applica>ons”


Just In Case

Just In Time

Sample Project


Max Cash Invested

Pay-‐back Month

RoI 3 yrs

NPV


Increased Sales

307K 17 286% 753K

Less Demand 182K 13 609% 977K

-‐€600,000

-‐€400,000

-‐€200,000

€0

€200,000

€400,000

€600,000

€800,000

€1,000,000

€1,200,000

1 7 13 19 25 31

Single Delivery Less Demand Previous

Fewer API Features than Planned were built as they weren’t really necessary -‐ saves Dev Team 30%

costs



Design Development Integra>on Deployment Produc>on

No of Code Changes

System

Interac>on

s

0

10

20

30

40

50

60

70

1 2 3 4 5 6

Debug Complexity

€ Improved Quality €

•  Conanuous Tesang •  Fast Break-‐Fix Cycle •  No building on Bad Code

Sample Project


€ Improved Quality € Max Cash Invested

Pay-‐back Month

RoI 3 yrs

NPV


Increased Sales

307K 17 286% 753K


Improved Quality

148K 12 851% 1.1M

-‐€600,000

-‐€400,000

-‐€200,000

€0

€200,000

€400,000

€600,000

€800,000

€1,000,000

€1,200,000

1 7 13 19 25 31

Single Delivery Improved Quality Previous

10% Less Development & 50% Less Support Costs finding/

tracking/fixing bugs and reworking features

Sample Project


Summary Max Cash Invested

Pay-‐back Month

RoI 3 yrs

NPV


Increased Sales

307K 17 286% 753K


Improved Quality

148K 12 851% 1.1M

Increased Innovaaon

-‐ -‐ -‐ -‐

Improved Moavaaon

-‐ -‐ -‐ -‐

Less Risk -‐ -‐ -‐ -‐

…. -‐ -‐ -‐ -‐ -‐€600,000

-‐€400,000

-‐€200,000

€0

€200,000

€400,000

€600,000

€800,000

€1,000,000

€1,200,000

1 7 13 19 25 31

Single Delivery Improved Quality

•  Payback Period reduces from 20 to 12 months

•  Max Cash Funding from 404K to 148K •  Year 3 RoI improves from 95% to 851%

•  è NPV from 347K to 1118K§ §(Assumed Discount Rate 6%)

Additional Benefits hard to quantify…


REDUCE COST

INCREASE BENEFIT

Improved Business Agility

More Mo>va>on

More Innova>on

Less Overhead

ECONOMIES OF SPEED

€ Stage Payments € € Increased Xac>ons Fees €

€ Fewer Bugs, Faster Debug €

Reduced Risk

€ Fewer APIs Developed €

Colm O’hEocha AgileInnova>on -‐ Agile & Kanban Training & Coaching

www.agileinnova>on.eu colm@agileinnova>on.eu

Q&A

18

Lean Software Development - Economics of Speed

Documents

max cash

flow t49

delivery month

months max payroi npv

discountedcumu t49

breakeven time point

roi t100

mgtadj t24