Using ROI For Requirements Is A Risky Business

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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 Expected Value

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Understanding the expected value of a possible future event allows us to make mathematically sound decisions. We can decide if we want to make an investment. We can assign a reasonable price for our services. We can prioritize requirements. Expected value is a calculation that should be used when calculating ROI.

Prioritizing requirements – three techniques

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Now that we’ve gathered all these requirements, how do we determine which ones to do first?

The less we know about our client’s business, the more the requirements appear to be equivalent. We’ll talk about three different approaches to prioritizing requirements.

1. Classical. Let stakeholders assign priority to the requirements.
2. Exhaustive. Explore every nuance of prioritization and its application to requirements.
3. Value-based. Let ROI drive the decisions. (hint: this is the best one – scroll down if you’re in a real hurry)
4. [bonus]. A look at how 37signals prioritizes features for their products.