Project Practitioners > ROI Based Prioritization

ROI Based Prioritization

By Brandon Carlson
When prioritizing the backlog one question that nearly always comes up is "What does this cost?" It's an honest question, especially from the business stakeholders. They would like to get an idea of what ROI they can expect from a feature in order to make more informed decisions. Armed with this information though, are they really more informed? To answer this question, we should examine the simple formula for ROI and discuss the numbers a bit.

We'll use this (admittedly simple) formula for calculating ROI:

ROI = (Profit - Investment) / Investment

Given the simple formula, a feature that makes the organization $10K and cost $8K to implement would provide an ROI of 25%. The first challenge we have when trying to perform ROI based prioritization is determining the expected profit for a given feature. Some may be quite a bit easier than others, for example, a feature that enables your application to connect directly to a customer's supply chain allowing a single, integrated view, but what about predicting the profit are you likely to get by making that usability tweak in the clumsy ad-hoc reporting feature of your product? Another aspect of the profit picture is that your customers are likely buying your software for its feature set, not just this particular feature. What percentage of overall profit is directly attributable to the feature. These numbers are all very difficult to predict and overly precise for the task of prioritization. You could spend weeks just coming up with the profit side of the equation!

Investment is the other side of the equation and is generally (not always) easier to predict than profit. Developers can put cost estimates in terms of ideal days/story points on individual stories in order to get a rough approximation of development costs for mature teams, this number can be pretty accurate. What these costs don't take into account however, is the amount of time spent in non IT areas of the feature such as analysis and UI design. Unfortunately for our ROI calculation, work outside of IT is generally not tracked by project/feature.

So, that leads me to my question from before... Are we really more informed with this information? For prioritization purposes, consider the following equivalent ROI equation:

ROI = (SWAG - Approximation) / Approximation
Using SWAGs and Approximations in dollars leads to a level of precision rarely needed in the prioritization process. It not only leads to longer lead times in the analysis and prioritization steps of your process, it provides only marginal value. If you must calculate ROI, use something just as arbitrary, but much simpler such as T-Shirt sizes (S, M, L, XL) for Profit and Investment values and go from there. Don't get caught in the Red Herring that is ROI prioritization.


Comments
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Brandon,

I think it's too hard to do it at a feature by feature level - because it also depends on "when" the feature is released. I've seen business folks be able to put fairly confident revenue estimates at a Release level - and it helps them decide if a feature is scheduled into the release.


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