Prioritization with ROI is generally thought of as a quantitative analysis. For hard ROI, that is true. For soft ROI, it is anything but true. You have to make a prediction of the utility of the requirement or feature. That predicted utility is based on our expected utility, which is based on your past experiences. Your past experiences are reflected in remembered utility, which is a function of experienced utility. How can you know with certainty, and use that to prioritize requirements or features?
How To Measure Costs When Calculating ROI
At a high level, it is easy to describe ROI – the return on the investment. But how do we measure the investment? There’s a problem when we have to go to the next level. Some costs are obviously incurred as part of our actions, and some costs happen even if we don’t take the action. We have to allocate those costs across all our actions or we won’t have an accurate reflection of our investment. Without an accurate model of our investment, we can’t calculate the return on our investment.
Using ROI For Requirements Is A Risky Business
We’ve talked repeatedly about using ROI to drive prioritization of requirements based upon value. ROI can be used as the basis for prioritization for all decision making.
If we fail to take risk into account, our calculations will certainly be wrong, and we may make a poor decision. When we talk about accounting for risk in this context, we mean that we are accounting for the unlikely, undesired, or unintentional outcomes. We use the term expected value to refer to the risk adjusted approximation of the outcome. In financial circles, this is also called discounting.
The most common mistake people make when calculating ROI is failing to take into account the expected value of the return or the expected value of the cost of a project.
Definition of ROI – Return on Investment
We talk about ROI all the time – what is it, in layman’s terms? ROI is the acronym for return on investment. Another way to think of it is “How much profit will we make if we invest in this project?” Profit is revenue minus costs. Technically, the question should […]