We now have a business value for the project which is $ Y - Z million.
The next step was for the business to break this down and allocate it to the different parts of the project. They did this as follows*:
1. Calculate exposure - 25%
2. Manage Collateral - 25%
3. Manage limit breaches - 20%
4. Synergy - 30% This is the value released when all parts of the project are in place.
We are currently at the point where we are about to break down the value to the next level. Initial discussions around collateral indicate the following:
1. Manage Letters of Credit - 75%
2. Other types of collateral - 25%
This means that most of the value for Collateral comes from Letters of Credit (LCs). LCs only account for 20% of the requirements. The agreement with the business is that a gold plated solution will be developed for LCs and a sticky tape and string solution for the rest of the collateral types.
Also the business value (to go on the XP Story card) for LCs will be an actual number, namely .75 x .25 x (Y - Z) million. The business value is a model rather than a number so we can determine the business value in a number of scenarios.
The project is calculating the ROI on the investment based on three estimates of the costs. One where the project costs the original estimate, one where it cost double and one where it costs 4 times the original estimate. This gives confidence of 10%, 50% and 90%. For more detail of this, check out Todd Little's forthcoming paper on actual versus estimate values for 120 projects.
Hopefully this illustrates how business value can be used to prioritise work on an XP project.