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- Let's talk about budget capacity

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and risk management in agile.

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Let us start with budgeting.

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The fundamental business question

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how much will it cost applies equally

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to agile, waterfall,

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or any other project management framework.

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However, budget management
as we do it in agile

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is fundamentally
different from traditional

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or waterfall project management.

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In agile, budgeting is
happening within sprints,

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either monthly or quarterly.

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Based on the team composition

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and compensation by role and location,

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the cost of each sprint
is calculated per team

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and multiplied by the number
of teams in the organization

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with all the necessary adjustments.

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Those can include loaded compensation

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including benefits and other expenses,

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any hardware costs, software
costs, licenses, supplies,

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and anything else required
to complete the deliverables.

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This is monitored as part
of the overall budget.

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In waterfall, a project budget is defined

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as the total projected cost that is needed

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to complete the project.

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And usually, it is allocated
over a defined period of time.

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It's used to estimate what
is the cost of the project

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phase by phase.

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The most fundamental difference

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between agile and waterfall
is that in waterfall,

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the budget is fully allocated

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at the beginning of the project.

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And during each phase, budget
is released step by step.

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And at any time,

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project manager can say are we on budget,

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are we below budget, or
do we exceed the budget.

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And if we do,

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that requires an immediate
course correction.

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In waterfall, it is hard to estimate

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whether a project is on
budget during the analysis,

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design, and even sometimes coding

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because none of the
features have been tested

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or delivered to users for their feedback.

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This is usually the reason
why waterfall project managers

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need to add a significant
contingency margin,

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usually starting at 20, 25%,

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and sometimes reaching even
40% for complex deliverables.

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But in both instances,
agile and waterfall,

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the following five sources
of information are considered

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when performing estimations.

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One is high level estimation
from the people doing the work.

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Second is historical data

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from similar deliverables and goals.

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Third one is lessons learned
from prior initiatives.

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Fourth is expert opinion
from subject matter experts

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known within the organization

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and sometimes within the field.

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And baseline, organizational
and industry wise.

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Agile puts the emphasis on

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decomposing the work to
be done into features

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and then performing high
level feature estimation.

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In addition, in agile,

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the validation of deliverables

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is performed throughout the process.

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And it's easy because teams
are delivering working software

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to the customer,

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and then they do re-planning

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based on customer and business feedback.

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If additional features are requested,

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the team does a high level
estimation of the work

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that is required to
deliver these features.

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And then the team provides an estimate

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to the sponsor or the requester.

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At this point, the sponsor
can make an informed decision

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whether it is worth
investing in more sprints

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or additional functionality

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based on cost per sprint and duration,

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or sometimes they prefer to descope

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if this is a less important functionality

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if they want to stay

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within the originally allocated budgets.

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So this makes all calculations
in agile very simple

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compared to the complexity
of budget calculations

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in waterfall.

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In waterfall, the phase of the project

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defines the value that is being delivered.

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And in agile, there are
just two major parameters.

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First, stable, dedicated agile teams,

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and the second is time boxed iterations.

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That's all you need to know.

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So let us review an example.

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Four team members of a scrum team

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are allocated to deliver an application

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that has a set number of features.

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Once they do high level estimation,

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the team forecasted that
they would need six sprints

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to deliver all the features.

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Each team has nine team members.

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Based on the organizational data,

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the average loaded rate,

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and loaded means a
blended rate per employee,

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is $150 per hour.

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The total cost calculation
becomes very simple.

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First, we'll look at employees per sprint.

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We have 10 full-time team
members and four teams,

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which gives us 40 employees per sprint.

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Then, we'll look at cost per
employee per a two week sprint.

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$150 per hour by 80 hours,
which gives us 12,000.

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We refer to it as the fixed
burn rate per person per sprint.

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This gives us cost per sprint of $480,000.

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Then, we'll look at six sprints

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and 480,000 multiplied
by six is $2,880,000.

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Then, we'll look at any additional costs,

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licenses, equipment, not
including vendor costs.

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In our case, it's $120,000.

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So the total estimated cost is

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$2,880,000 per people and labor

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and then 120,000

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and total of 3,000,000 for this project.

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It is important to
understand that in agile,

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an estimate is not a commitment.

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It is a forecast which will
be adjusted sprint by sprint.

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It's adjusted by validation
with the customers,

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with the business,

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and it is based on
incremental deliverables,

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and overall, fast feedback loop.

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The comparison of agile and
waterfall cost management

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is presented on this slide.

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Once the budget is established,

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the following strategies allow agile teams

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to continuously refine the budget.

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First, high quality product backlog

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that reflects MVP, minimum viable product

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and subsequent feature list.

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The second one is continuous
product backlog refinement

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that happens along with
the consistent estimation.

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The third is short feedback
loops that happen through demos

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and sprint reviews with the customers.

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The fourth one is agile planning

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to implement the value
of iterative delivery.

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There is also an ultimate
approach to agile budgeting,

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the principle of beyond budgeting.

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It has been implemented in
some agile organizations,

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but very few due to its
revolutionary nature.

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This approach represents a
new management philosophy

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that is more agile and adaptable,

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aiming at eliminating bureaucracy

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and rigid control mechanisms

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that happen in most of the organization.

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It empowers people.

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So instead of focusing on
long term complex budgets,

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which become obsolete as soon
as they're published frankly,

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beyond budgeting organizations
focus their budgets

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on short term financial
performance sprint by sprint,

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very similar to agile delivery.

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Now, let's move to the
agile risk management.

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A risk is anything that could prevent

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or marginalize project success.

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When a risk materializes,
it becomes an issue.

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Agile practices provides
a built-in mechanism

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to manage a wide range of risks.

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And those risks are frequently encountered

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in software development
and overall in business.

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Agile doesn't offer a
universal definitional of risk.

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It doesn't provide a standard
approach to risk management

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because risk management in agile

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is built into the cadence

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in such a way that agile
provides a framework

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to manage risk early and proactively.

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For example, agile has
continued improvement

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based on the short feedback cycle,

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so all the potential issues
are exposed very early

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and triaged within a short time frame.

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In addition, the
transparency of agile culture

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with retrospectives,
feedback, and so forth

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contributes to exposing risks early.

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And once you expose risks,

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you are able to address them without blame

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in a very efficient way.

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So as an example, in daily scrum meetings,

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team members have to answer the question,

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which impediments am I having?

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And then the whole team gets engaged

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in unblocking their peers.

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In waterfall projects,

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team members are mostly focused
on their individual tasks,

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so there are no similar mechanisms
to expose the risk daily

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and to triage them immediately.

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This way, waterfall has to manage risks

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in a very consistent and heavy way.

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Agile doesn't have to.

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The built-in mechanisms are the reason

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why most agile frameworks
do not really specify

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how they have to manage risks.

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Risks are managed via early feedback,

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collaboration between
business and technology,

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test driven development

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where the quality is built
into the delivery process,

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and many other mechanisms
that mitigate risks upfront.

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For external risks and
dependencies that happen in agile,

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there are still multiple mechanisms

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and tools available for risk management.

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For example, some agile practitioners

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still maintain a list of
risks for their teams.

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And those include external dependencies

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and especially the ones outside of IT

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that could be vendor,
legal, compliance issues,

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regulatory licensing,
and many other risks.

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And those risks need to be assessed

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and mitigated similar to any other company

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irrespective of their framework,

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agile or waterfall.