Business justification is first assessed prior to a project being initiated and is continuously verified throughout the project lifecycle. This is a very important step in Scrum methodology. The project should make business sense in each and every part of its lifecycle. Estimation of the project value is a major way of establishing business justification. Estimating the project value helps the decision makers make the vital decision such as to continue with the existing project or not. The guide to Scrum body of knowledge (SBOK) provides insights into various methods which can be used to effectively measure the project value to aid the Scrum team in making very important strategic decisions. The value to be provided by business projects can be estimated using various methods such as Return on Investment (ROI), Net Present Value (NPV) and Internal Rate of Return (IRR).
These techniques captured from the guide to Scrum body of knowledge (SBOK) are explained below in detail:
Return on Investment (ROI): ROI when used for project justification assesses the expected net income to be gained from a project. It is calculated by deducting the expected costs of investment of a project from its expected revenue and then dividing this (net profit) by the expected costs in order to get a rate of return. Other factors such as inflation and interest rates on borrowed money may be factored into ROI calculations.
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.
Net Present Value (NPV): 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.
Internal Rate of Return (IRR): 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 projects 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.