Discussing Agile With a CFO

The Chief Financial Officer is responsible for financial planning, financial reporting, financial analysis and managing financial risks. What would be a better language than finance, to explain the benefits of Agile to a CFO?

David Chilcott, started this interesting discussion on the Scrum Development group to understand the important points about Agile which would interest a CFO. Michael Spayd mentioned that he would certainly like to talk in terms of pure business benefit. According to Michael, he would talk about

• The benefits of frequent deployments by considering the NPV for a waterfall and an Agile project.
• The ability to stop a successful project when it is past its value realization curve.
• Capitalization vs. expense benefits in terms of how the investment of Agile projects is accounted for in the company's books vs. waterfall projects.
• Lower turnover on Agile teams thus leading to lower training and hiring costs.

Likewise, John Goodsen suggested that he is more inclined to use lean thinking than Scrum when talking to the CxO's. According to John,

I like to feel them out if they understand the difference between cost and throughput accounting, first, and then understand which model they are using. If it's the latter, you are on solid ground. If it's the former, then you have more work ahead of you. The follow-on conversation is about the cost of WIP, the cost of Delay and the value of Limiting WIP to establish flow. You might draw an ROI over Time chart that compares to traditional development showing short, frequent releases do not require as deep of an initial captial investment before you see a return.

According to John, the longer you wait to deliver value and receive money, the deeper the investment gets. Small features should be released on frequent intervals to establish a quicker return on investment. John has an interesting picture to show the ROI difference for an Agile versus a waterfall project scenario.

Trond Wingård presented his thoughts about Agile for a CFO by comparing the NPV (net present value), IRR (internal rate of return), payback period and ROI (return on investment) for a waterfall project and an Agile project. He laid down the criteria for his fictional project as

 Let’s imagine a project:

• It is scheduled to last for 12 months
• During that time it costs 5 million USD
• The resulting product will provide a financial benefit of USD 200,000 per month (extra revenue or saved costs minus any monthly expenses), until
• The product abruptly stops producing its benefit 4 years after the project is started. You may say there’s a 4-year window of opportunity for this particular product.
• (I also assume a 10 percent discount rate in the NPV calculations

According to the calculations, the statistics for a going in a waterfall mode versus making one release every 6 months versus making a release every 3 months were as follows,

Likewise, Trond aslo compared the situation when there was a 4 month delay in the project. Still, as per the numbers, making frequent releases justified the financial statement

Trond's worksheet for the CFOs can be downloaded here.

Thus, there is enough meat to discuss Agile in financial terms with the CFO. The numbers under various scenarios adequately demonstrate the benefit of going Agile.