Return on Investment (ROI) is a Measurement that is essential to Stakeholders. They have taken a Risk by investing money in a Project or Venture. They want to know that they should get their money back. Ideally they will achieve added Growth and Revenue on their investment. Return on Investment normally has a different time horizon from the Project that Delivers the Product or Service. For instance, consider a brand-new Product has been Developed that will bring in an extra $5 million over the next 2 years. The Project is complete before any of that new income has actually been realised.

Not all Projects do increase Revenue. Where an Organization needs to adhere to new legislation, it is not to increase revenue. Instead it is to avoid non-compliance and the fines and levies that might result from non-compliance. The success of such Projects is non-negotiable.

When to Apply Return on Investment Calculations

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

• comparing the ROI of a Scrum Project or another Agile Framework versus a Traditional Project. This helps to choose which Framework to select (strategy).
• using ROI to Measure when the specified Benefits for a Product are reached (Benefits Management).
• using ROI to figure out whether the Scrum is Delivering Value with the required Velocity (Project Management).

We will just talk about the last case. Please remember that it is essential to define which Investment you are trying to validate with your ROI calculation to prevent confusion.

What is the Return on Investment Formula?

Well, it depends. ROI is among lots of Profitability Ratios used by accounting professionals, and the generic formula is very basic.

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

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

The share offering is ₤ 1 per share, and he purchases 1 000 shares. Bill determines his ROI therefore:-.

ROI = (₤ 1 500 – ₤ 1 000)/ ₤ 1 000.

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

Finding the ROI of a Project.

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

In a Scrum Project, due to the fact that the Development remains in Iterations, and due to the fact that Stakeholders are involved throughout the Project, ROI can be assessed throughout the Project. Ideally at the end of every Iteration, a brand-new component of the total Product is made readily available to the Stakeholders. The stakeholders may then evaluate and Test the deliverable. ROI can be determined at this stage.

The Product Owner is Responsible for computing ROI. They are also responsible for any other Project Metrics. The Product Owner is Tasked with ensuring that the Scrum Delivers the expected Business Value.

We found these books great for finding out more information on Agile Scrum:

What Data is Required to Measure the Return on Investment?

In an Agile Project, specifically if the Scrum Framework is adopted, ROI can provide benefits. ROI can be used to Demonstrate the Ratio of Project Revenue against Project Costs to Date. The difficulty is that, unlike Traditional Projects, Total Revenue and Project Costs are unsuitable Measures in Scrum. This is due to the fact that the Project is Time-Boxed and expenses are Fixed. The one thing that is not fixed is the Scope. To achieve a meaningful ROI, we are required to understand how much of the Product we have actually Delivered. The information 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 allocated to the Sprint by the Scrum Team (Scrum Master, Product Owner and Development Team).

Typically a Points score is credited to each User Story by the Development Team. Different Value systems are however utilised by different Teams. 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 is referred to as the Velocity. The actual time taken to complete the Sprint is also identified and this is a Fixed Value expressed as the 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 approximately the same.

Risk and Uncertainty

Scrum Works with Risk and Uncertainty, and these reduce with each Sprint. The Estimation of Velocity is least reliable for the first Sprint, however will improve as the Project advances. We can calculate 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 all User Stories that are “Done”, or finished and Meeting all the User Acceptance Criteria. For instance:-.

ROI for the Sprint=(150 – 100)/ 100.

or 50%.

where Velocity = 150 and Points completed = 100.

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

We can likewise calculate an ROI for the Scrum as a whole. This is done in the same way. The Cumulative Velocity for the Scrum can be 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 could also be considered to be the confidence level in the Scrum, which must rise as each Sprint is completed.

Reporting on the Return on Investment.

The ideal Meeting for reporting on the ROI is the Sprint Review Meeting. Within this meeting the ROI for the Sprint and the ROI for the Scrum to date can both be reported on. It can also be used in the Sprint Retrospective to quickly evaluate whether the Team is improving or at least maintaining the Delivery of Value.

This is only one method to compute ROI in a Scrum Project. The Product Owner can also utilize these Metrics as an early warning system that the Project is Delivering below expectations and take restorative action.