Financing Agile Projects

Here’s a story about a major toothpaste manufacture .In a bid to improve their sales, they decided to offer 400g toothpaste for the price of 300g. A normal 300g toothpaste, if it lasts 30 days in a household, could now potentially last 10 days longer.This wasnt good. It would affect long term sales. To counteract this, the manufacturers got clever.They increased the diameter of the toothpaste tube outlet. They were counting on the customer maintaining their behaviour. Consumers would cover the length of the toothbrush irrespective of the volume of toothpaste .

The takeaway for me in this story is that consumers were not able to extract value out of the increased offer because they focussed too much on a single dimension. Business firms also run their departments using a single dimension – budgets be it in monetary terms or resource terms. Whilst this soft constraints based model worked well with the predictive methodologies which had discrete decision points, it does not sit well with the Agile methodologies.

Executives need to change the way they think about IT project financing. Agile projects are like the toothpaste with extra 100g. To extract the true value, the consumer needs to change their behaviour. Agile methodologies, done in the right way, deliver to business strong risk management, flexibility and quicker returns. The following behavioural change is required for project financing

1. Budget based financing –> Line of credit / Venture capital financing
Provide different levels of capital based on demonstrable results for IT projects.

2. Returns –> Risk vs Return
Focus on mitigating risks as much as earning returns

3 Fixed Price –> Real options
Seek more flexibility to change the direction of the program of work

4. Worrying about sunk costs –> Fail fast
A quicker feedback cycle helps prevent overcommitment