Creating Your Software Development Investment Model

For most organizations, software development is thought of as a project to be funded and not an investment to be made. It is a sad and simple truth that almost all organizations, including those that say they are Agile, follow an annual funding model where work is identified and then funding is requested and approved.

Even frameworks such as SAFe don’t move the needle very much, though I think they believe they do. Funding by value streams is still a funding request and not an investment decision, and I think there is a really big difference.

Additionally, I think the value stream in many ways is like buying the mystery Disney pins, I know there are pins in the package but which ones have value I won’t know until I open the package, and then it’s too late to adjust and pick another one.

For most of us, we invest by taking a percentage of our salary and put that money into an investment fund of some sort where the investment grows over time.

You don’t ask yourself to fund the investment and pay for it in a lump sum so why would you treat your software development efforts any differently?

When we build an investment portfolio of stocks and bonds we are looking to diversify our risk related to what we expect to get as a return(value). I suggest that the investments that you make for your organizations’ technology enablement follow the same pattern.

The first step you must take to adopt an investment approach for your technology enablement is to create stable funded teams. Remove the project expense mindset from the equation, this is a very important aspect of creating an Agile organization.

With funded teams, your focus now becomes centered around your products, which you can think of as your stocks and bonds.

We might think of our Product Development investment approach like this:

· Sustainment (think a stock with nice dividends)

· Growth (think replacing old technology with new, the risk may be high but the return is also high)

· Bonds (think architectural work that provides long-term value related to all of our ‘ilities’)

An investment strategy is also a personal one and it will be important that we don’t have an imbalance in your investment portfolio.

As with any portfolio, we want to balance our investments across a range of investment types. Too much in one area increases the risk or the portfolio overall.

For example, if you are young and want your investments to grow quickly you are likely to have a portfolio that includes more investments that offer above-average returns. These investments will also contain higher risk, however, the risk is more manageable because you have a longer time horizon. If however, you are near retirement you aren’t going to want to risk years of investment growth on risky stocks that will put your retirement in jeopardy.

Organizations can apply a similar concept.

For example, if you are a startup you are will likely take risks on new features and technology as the return can be quite high from a growth perspective. Whereas if you are a stable or highly regulated organization you may seek out less risky investments that will maximize stakeholder value and feature a more calibrated or incremental approach to product enhancements.

As you consider building a Portfolio Investment approach for your organization you will want to develop your understanding of what Value is and then develop a risk profile that focuses on the predictability of your team’s delivery (this could be story points or just the total number of stories).

We need to risk adjust our value, just as we do when making any investment, there is always some risk related to any expected return.

What we are striving for is the development of a continuous planning capability that allows you the opportunity to ‘invest’ in anything that seems valuable when you see the need. However, since you already have a set of investments in your portfolio you will have to ‘sell’ off an investment in the portfolio to be replaced with the one you want to purchase.

If you don’t follow this discipline then you are violating good investment practices. If you don’t ‘dump’ a current investment for the new one then you are essentially purchasing that new investment with borrowed money or what we call selling short. With technology investments selling short would require that you have people working on multiple projects or teams, which ultimately raises risk. And with short selling eventually, there is a margin call, and for this scenario, the margin call will be lower quality and missed dates.

Any investor, individual or organizational, has a fixed amount of investment capital, and when you try to spend more than you have nothing good will come of it and in the end, you could end up with nothing.

The only way to not ‘borrow’ money is to increase your amount of investment (think adding a new dedicated and funded team).

To ensure that we are making the right investment decisions, we must view our entire portfolio and make value-based decisions across it. It is this transparency that will allow us to maximize our investments so they provide us the highest return possible, within the context of our risk profile.

In a traditional project-funded model this would be like you giving 10 random people 1 million dollars each and asking them to invest what they think will provide the most return. Without the context of what you value at the portfolio level, it is highly unlikely that they will purchase stocks that align with your risk/return profile.

By funding projects requested by individual investors (business units) that aren’t driven by an overall investment strategy, you are likely making investments of higher risk with less return than you would be comfortable if it was your money.