BABOK v3 Financial Analysis and Agile Techniques 7.12 from BABOK v2

Technique 10.20 – Financial Analysis

By Julie Ramsey

Scrum Master

 

Purpose – Used to understand the financial aspects of an investment, solution or solution approach.
 
Description – This technique assesses the expected financial viability, stability and benefits for investment options.  The total cost of change and the costs and benefits of using and supporting the solution are considered.
 
Financial analysis allows Business Analysts to recommend investment in change initiatives through comparison of various possible solutions.  Initial and ongoing costs, financial benefits and risks are all considered.
 
Once a solution is chosen, financial analysis may continue to be used to gauge if adjustments should be made or the initiative should be discontinued.
 
Elements
Cost of the Change – Includes the expected costs to build or acquire the solution and transition the enterprise to the future state.  The cost of change may include items such as equipment, facilities, staff, penalties, converting data and rolling out the changes.
Total Cost of Ownership (TCO) – Includes the cost to acquire, use and support a solution.  Organizations may assume a standard life expectancy for the components of the solution to calculate these costs and evaluate the potential value of the solution.
Value Realization – Planned value may be expressed annually or cumulatively over a specified time.
Cost-Benefit Analysis – A prediction of the expected net benefit calculated by subtracting the expected total costs from the expected total benefits.  Assumptions used to determine costs and benefits should be clearly documented and the estimating methodology clearly described so both can be reviewed, adjusted and approved.  The cost-benefit analysis should project far enough in the future to cover the time when the planned value is realized.
Financial Calculations – A variety of standard financial calculations are used to consider when and how different investments will deliver value.  These calculations consider things like risk, upfront money, time until realization of benefits and time to recoup initial investment.  Financial calculations include return on investment, discount rate, net present value and payback period.
 
Usage Considerations – Strengths
·       Allows for objective comparison of different investments from different perspectives
·       Clearly states assumptions and estimates providing for challenge or approval
·       Enables the Business Analyst to re-evaluate if there are changes
 
Usage Considerations – Limitations
·       May be hard to quantify some costs and benefits
·       Will always include a level of uncertainty regarding the costs and benefits
·       Could provide a false sense of security based on positive numbers
 

Technique 7.12 – Real Options

By Julie Ramsey

Scrum Master

 

Purpose – Helps determine when to make decisions.
 
Description – This technique is used to manage aversion to uncertainty by defining conditions for when a commitment should be made.  Real Options allows stakeholders to delay making decisions until the last responsible moment.  It also decreases how many decisions need to be considered at a time.
 
There are three rules to Real Options:
1.       Options have value
2.       Options expire
3.       Only commit to a decision early, if you know why you’re doing so
 
Keeping options available gives them value.  However there comes a point by which a decision must be made.  If the option never expires there is no value since a decision never needs to be made.  Waiting until the last responsible moment to commit allows for feedback and learning as well as the chance to make a change.  This technique is often used for refinement and prioritization.
 
Elements
Options – The options themselves.  For example, a hotel reservation could be an option.  It expires by a certain time when the customer may no longer cancel and will be billed regardless of stay.  Another example is a user story providing a specific functionality.  The user story expires when the business need changes.  Things you cannot afford, don’t have the tools to do or can’t do in time are examples of activities that would not be options.  Once an option is committed to, other options expire.  There may be a penalty for failing to meet a commitment.
Commitments – An example of a commitment is arriving to work on time.  Failure to meet this commitment may result in disciplinary action.  Another commitment is delivering items from the product backlog in the timeframe promised.  Failing to meet this commitment will erode trust and damage the team’s brand.
Options Expiry – The expiry date is conditional.  It forces one to consider when the option expires resulting in no choice.  Knowledge of the expiration date allows decisions to be made just in time. 
Right/Wrong/Uncertain – Business Analysts gather information until just before the first option expires.  This improves the chance of making the right decision with as much knowledge as possible.  It also prevents a decision being made too early when there is a higher level of uncertainty.
 
Usage Considerations – Strengths
·       Decision making is simplified by following the three simple rules
·       Decisions can be made faster since the focus is on the most immediate decisions only
 
Usage Considerations – Limitations
·       Requires analysis of systems from outputs to inputs which may be counterintuitive
·       Not a rote process; requires practice and study to use skillfully