Agile Business Coach

Risk and Agile

(IT) Projects should deliver a business value of X for a cost of Y. There is uncertainty or risk associated with a project. A project can cost more than Y. It can deliver less value than X. In some extreme cases, the project can damage the existing business model, actually destroying business value. (IT) Projects can learn from Financial Market in its management of risk, especially the use of Real Options.

Risk is uncertainty. When you know something with certainty, good or bad, you manage the situation, there is no risk associated with it. Financial markets manage risk using derivatives, especially options. Real Options are a way of applying financial option theory to project risk management. An option is “The right but not the obligation to do something.” Options occur naturally within a project. It is the role of the project manager to manage these options for the optimal benefit of the project.

Financial Option Theory tells us that it is never optimal to exercise an option prior to its maturity.

Traditional Waterfall Methodologies destroy options by making decisions earlier than they need to be made. They insist that the requirements are specified up front, that is the option to change the requirements is destroyed or subject to change control. Waterfall methodologies insist that the system is designed up front, making it difficult to change. This means that Waterfall Methodologies find it difficult to cope with uncertainty or change.

Agile methodologies keep options open. They allow the user of the software to change their mind on the requirements at any point up to the last iteration. Agile methodologies encourage continual design throughout the life of the project. Design is performed “just in time”. Keeping options open means that Agile methodologies are better suited to manage uncertainty and change.

Posted by chrismatts at October 13, 2004 3:41 PM