While you may ignore economics, it won’t ignore you.
—Don Reinertsen, Principles of Product Development Flow
Principle #1 – Take an economic view
Achieving the goal of Lean—that is, the shortest sustainable lead time with best quality and value to people and society—requires understanding the economics of a mission. Without that, even a technically competent system may cost too much to develop, take too long to deliver, or incur manufacturing or operating costs that cannot economically support efficient value.
To this end, the entire chain of leadership, management, and knowledge workers must understand the economic impact of the choices they’re making. Traditionally, the economic constraints on their activities are known only to the decision-makers and authorities who understand the business, marketplace, and customer finances. However, centralizing such knowledge means that a worker’s everyday decisions are either made without this information or escalated to those who have it.
The first choice directly undermines economic outcomes. The second increases delays in value delivery, which ultimately has the same effect.
SAFe highlights the important role of economics in successful Solution development. Therefore, SAFe’s first Lean-Agile Principle is to take an economic view. It’s Principle #1 for a reason: if the solution doesn’t meet the Customer’s or solution provider’s economic goals, then its sustainability is suspect. Solutions fail for many reasons, and economics is a big one. This article describes the two essential aspects needed to achieve optimum economic outcomes via Lean-Agile methods:
- Deliver early and deliver often
- Understand the economic trade-off parameters for each program and Value Stream
Each is outlined in the sections below. In addition, SAFe represents many of these principles directly in its various practices. That is the subject of the Economic Framework article.
Deliver Early and Often
Enterprises decide to embrace Lean-Agile development either because their existing processes aren’t producing the results they need, or because they anticipate that they won’t do so in the future. By choosing a Lean-Agile path, they are embracing a model based on incremental development and early and continuous value delivery, as Figure 1 illustrates.
That decision alone contributes perhaps the primary economic benefit, as illustrated in Figure 2.
This figure shows how Lean-Agile methods deliver value to the customer much earlier in the process. Moreover, this value accumulates over time: the longer the customer has it, the more value they receive. Conversely, with the waterfall model, value can’t even begin until the end of the planned development cycle.
This difference is a material economic benefit of SAFe. What’s more, the picture above does not even account for the advantage of far faster feedback for the solution and of eliminating the probability that the waterfall delivery would not occur on time or may not demonstrate fitness for use. And there is a third and final factor, as shown in Figure 3.
Figure 3 illustrates a key differentiator, as long as the quality is high enough: products and services delivered to market early are typically more valuable. After all, if they arrive ahead of the competition, they aren’t available from anyone else and therefore are worth a premium to the buyer. Over time, features become commoditized. Cost, not value differentiation, then rules the day. This means that even a Minimum Viable Product (MVP) can be worth more to an early buyer than a more fully featured product delivered later.
The net effect is that cumulative gross margins are higher. This is the premise of Lean-Agile development, one that’s firmly entrenched in the Lean-Agile Mindset and that drives the development of the solution in the shortest sustainable lead time.
Understand Economic Trade-Off Parameters
The rationale discussed above drives embracing a more effective economic model of faster delivery. However, there is far more work to be done when executing a program. After all, economic decisions made throughout the life of the solution will ultimately determine the outcome. Therefore, it’s necessary to take a deeper look at additional economic trade-offs. Reinertsen describes five factors that can be used to consider the economic perspective on a particular investment, as Figure 4 illustrates .
In this illustration:
- Development expense – Is the cost of labor and materials required to implement a Capability
- Cycle time – Is the time to implement the capability (lead time)
- Product cost – Is the manufacturing cost (of goods sold) and/or deployment and operational costs
- Value – Is the economic worth of the capability to the business and the customer
- Risk – Is the uncertainty of the solution’s technical or business success
Understanding these trade-offs helps optimize life cycle profits, which is the key to unlocking optimum development economic value. But it requires a deeper project understanding. Here are two examples:
- A team building a home automation system estimates that moving more functionality to software can reduce the cost of electronic parts by $100. But it would delay the release lead time by three months. Should they do this? Clearly, the answer is it depends. It depends on the anticipated volume of the product to be sold compared to the Cost of Delay (CoD) of not having the new release to market for three extra months. Some further analysis is required before that decision can be made.
- A large software system with substantial technical debt has become extremely difficult to maintain. The development expense is largely fixed. Focusing on the technical debt now will reduce the near-term value delivery. But it will also reduce lead time for future features. Should they do it? Again, the answer is it depends. More quantitative thinking will need to be applied.
In addition to the trade-off parameters, Reinertsen describes a number of key principles that help teams make informed decisions based on economics. These include:
- The Principle of Quantified CoD – If you only quantify one thing, quantify the CoD
- The Principle of Continuous Economic Trade-Offs – Economic choices must be made throughout the process
- The Principle of Optimum Decision Timing – Each decision has its ideal economic timing
- The Sunk Cost Principle – Do not consider money already spent
- The First Decision Rule Principle – Use decision rules to decentralize economic control
Learn More Reinertsen, Donald. The Principles of Product Development Flow: Second Generation Lean Product Development. Celeritas Publishing, 2009.
Last update: 22 October, 2017