The New ROI in Software Development
- Applications and ROIs
- Why ROIs Matter
- The Business Case
- Cash Flow ProjectionsThe Business CaseWhy ROIs Matter
- Payback Time
- Breakeven Time
- Net Present Value
- Breakeven Time
- Internal Rate of ReturnBreakeven Time
- Summary of the Terms
- An Example
- Incorporating MMFs into the Financial Case
- Comparing the MMF-based ROI with the Classic ROI
- Taking the Risks into Account
- The Impact of MMF Ordering
If software development is to be treated as a value creation exercise, a solid understanding of the financial metrics used to evaluate and track value creation activities is necessary. In this chapter we define these metrics and show how they are impacted by the introduction of MMFs and incremental delivery concepts.
Applications and ROIs
In the world of commercial application software development, good ideas, technology, and design are rarely sufficient to elicit approval for a project. The reality of the commercial world is that software development is an investment. As with any investment, it involves certain risks and is made with the objective of achieving a return on that investment.
Of course, the return on that investment does not have to be in quantifiable financial terms. But usually, unless there is a measurable financial benefit, it is hard to justify an application software development activity, and especially hard to obtain approval from a finance department for that activity. Troy Zierden, business-intelligence capability manager at electronics retailer Best Buy, says it's very difficult to get project approval when returns on investment are intangible, since there's a team of accountants at his company who watch the numbers very closely.
Today's software methodologies tend to begin at the point where the development project has been approved, that is, after the ROI discussions have taken place and conventional methods of measuring ROI have been applied. The software designer, or the software methodologist, is usually not involved in the ROI discussions. As a result, the reasons for funding a project are largely opaque to the designer. Sadly, this means that the designer rarely has any input on the ROI discussions. Our approach changes this, by breaking the black box of application software development, and engaging architects and designers in the investment that we call software development. The result is a radical transformation of the traditional ROI model.