Return On Investment Vs Lean Agile Metrics for Strategic PMs

There are well-established ways to evaluate investments – and potential projects – for an organization. However, the speed of change has made these methods less reliable – and ushered in a more lean-agile approach to metrics.

This post examines the difference between ROI and Lean-Agile metrics, It identifies the key metrics of each, and the drivers behind those metrics. Finally, it looks at the impacts of these opposing approaches on strategy and project management.

The Difference between ROI and Lean-Agile Metrics

Traditional ROI is part of traditional financial analysis and decision-making frameworks. By contrast, Lean-Agile approaches focus on principles and practices derived from Lean thinking and Agile methodologies.

Here’s how investment and performance metrics differ between the two approaches:

  1. Focus on Value Delivery vs. Financial Metrics
    Lean-Agile approaches prioritize value delivery to customers through iterative development, continuous improvement, and customer collaboration.

    Traditional financial metrics like ROI (and others to be explored below) are still relevant! However, Lean-Agile methodologies emphasize delivering value incrementally and rapidly adapting to changing customer needs.

  2. Iterative and Incremental Development vs. Long-term Projections
    Lean-Agile methodologies advocate for iterative and incremental development. Value is delivered in small increments over time.

    Traditional financial analysis, which often involves long-term projections and planning based on largely fixed assumptions.

  3. Empowerment and Collaboration vs. Centralized Decision-making
    Lean-Agile approaches emphasize empowerment, autonomy, and collaboration among cross-functional teams. Decision-making is decentralized, with teams having the authority to make decisions at the lowest possible level.

    Traditional financial analysis often involves centralized decision-making by senior management based on financial metrics and projections.

  4. Customer-centricity vs. Profit Maximization
    Lean-Agile methodologies prioritize understanding and meeting customer needs through frequent feedback and validation. The focus is on creating value for customers rather than solely maximizing profits.

    Traditional financial analysis tends to prioritize financial metrics such as ROI and others, which are centered around profit maximization and shareholder value.

  5. Adaptability to Change vs. Predictive Planning
    Lean-Agile approaches embrace change and uncertainty, advocating for flexibility, adaptability, and responsiveness to market dynamics. Pivots are common and expected.

    Traditional financial analysis often relies on predictive planning based on assumptions and forecasts, which usually do not allow for unexpected changes or disruptions.

  6. Flow Efficiency vs. Optimization of Financial Metrics
    Lean-Agile methodologies prioritize flow efficiency by minimizing waste, reducing lead times, and optimizing the flow of value delivery.

    While financial metrics such as ROI and others are still relevant, they are focused solely on optimizing financial metrics. They have no focus on optimizing flow efficiency and thus fall short on flexibility, adaptability, and other benefits that are important under rapidly evolving conditions.

Traditional financial analysis and Lean-Agile approaches both aim to support effective decision-making and value creation. However, they differ in their focus, principles, and methodologies.

Lean-Agile methodologies place greater emphasis on iterative development, customer-centricity, empowerment, adaptability, and flow efficiency – based on principles and practices derived from Lean thinking and Agile methodologies. Traditional financial analysis prioritizes financial metrics, centralized decision-making, long-term planning, and profit maximization.

Both have their place and can be beneficial!

Let’s dive a little deeper, starting with ROI.

The Traditional ROI Approach

Traditional ROI arose in the pre-digital, more industrial age. This was characterized by investments primarily in physical assets that would provide a relatively steady and predictable return over a lengthy period of time.

Here’s an example of a traditional ROI approach to business investment:

Let’s consider a manufacturing company that is evaluating whether to invest in upgrading its production equipment. The company currently operates with older machinery that is becoming increasingly inefficient and prone to breakdowns, leading to downtime and higher maintenance costs. Management believes that investing in newer, more advanced equipment will improve productivity, reduce downtime, and ultimately increase profitability.

In a traditional ROI approach, the company would typically follow these steps:

  1. Identify Investment Options – Research different equipment vendors and models to determine the available options for upgrading the production equipment.
  2. Estimate Costs – Estimate the costs associated with purchasing and installing the new equipment, including the upfront capital expenditure, installation costs, training expenses, and any additional infrastructure upgrades required.
  3. Forecast Benefits – Forecast the potential benefits of the investment. Benefits include increased production output, reduced downtime, lower maintenance costs, and improved product quality. The benefits – usually fairly reliable and consistent for the long-term – would be quantified in monetary terms wherever possible.
  4. Calculate ROI – Using the estimated costs and forecasted benefits, calculate the expected return on investment (ROI) over a specified time period. The ROI formula typically compares the net gain from the investment (benefits minus costs) to the initial investment, expressed as a percentage.
  5. Perform Risk Analysis – Assess the risks associated with the investment, including factors such as market demand fluctuations, technology obsolescence, and competitive pressures. Then incorporate these risks into their ROI calculations and decision-making process.
  6. Make Investment Decision – Decide on whether to proceed with the investment in the new production equipment. The decision would typically be based on whether the expected financial returns meet the organization’s investment criteria and risk tolerance.
  7. Monitor Performance – After implementing the investment, monitor the performance of the new equipment and track key performance indicators (KPIs) such as production output, downtime, and maintenance costs. This ongoing monitoring serves to assess whether the investment is meeting expectations and making the desired impact on profitability.

This traditional ROI approach provides a structured framework for evaluating business investments based on their expected financial returns and associated risks. It helps companies make informed decisions about where to allocate their resources to maximize shareholder value and long-term sustainability.

Other Traditional Investment Metrics Like ROI

In addition to ROI, several other financial metrics and qualitative factors can be valuable for making investment decisions.

Here are some recommended methods – along with potential shortcomings in rapidly evolving environments:

  1. Net Present Value (NPV)
    NPV calculates the present value of all future cash flows generated by an investment, discounted at a specific rate (the cost of capital or the required rate of return). A positive NPV indicates that the investment is expected to generate value, while a negative NPV suggests that it does not. NPV accounts for the time value of money and provides a more comprehensive view of the investment’s profitability over its entire lifespan.

    The shortcomings are the assumption of fixed cash flows, a steady interest rate, and minimal change in conditions.

  2. Internal Rate of Return (IRR)
    IRR is the discount rate that makes the net present value of an investment’s cash flows equal to zero. It represents the annualized rate of return that an investment is expected to generate. A higher IRR typically indicates a more attractive investment opportunity, as it signifies a higher return relative to the cost of capital. IRR is useful for comparing different investment options and assessing their relative attractiveness.

    Like NPV, IRR is based on the assumption of fixed cash flows and minimal change in conditions.

  3. Payback Period
    The payback period measures the time it takes for an investment to recoup its initial cost through the cash flows it generates. Shorter payback periods are generally preferred, as they indicate a quicker return on investment, which means lower risk. Payback period analysis helps assess the investment’s liquidity and the time it will take to recover the initial capital outlay.

    The Payback Period is still based on the assumptions of fixed and relatively certain cash flows as well as certainty on the amount invested.

  4. Risk-adjusted Return Metrics
    Risk-adjusted return metrics, such as the Sharpe Ratio or the Sortino Ratio, incorporate measures of investment risk into the evaluation process. These metrics assess the return generated per unit of risk or the return achieved relative to a benchmark after accounting for volatility. Risk-adjusted metrics help investors assess the trade-off between return and risk and make more informed investment decisions.

    Even so, Risk-adjusted Return Metrics support only an up front investment commitment based on assumptions of investment amount, cash flows, and interest rate.

  5. Qualitative Factors
    Qualitative factors encompass non-financial considerations that can influence investment decisions, such as strategic alignment, market demand, competitive landscape, regulatory environment, technological trends, and organizational capabilities. Qualitative analysis involves assessing factors that may impact the investment’s success but cannot be easily quantified. It requires careful evaluation of industry dynamics, customer preferences, brand reputation, management quality, and other intangible factors that contribute to long-term value creation.

    The problem is that the Qualitative Factors are all considered up front before the entire commitment is made. This provides limited opportunity to adapt to evolving and changing conditions..

By considering a combination of financial metrics, as well as qualitative factors, investors can gain a more holistic understanding of investment opportunities. They can make well-informed decisions that align with their objectives, risk tolerance, and strategic priorities.

The shortcoming is that they are based on assumptions that may be subject to major shifts. Traditional investment metrics do not allow adaptation to change very well. The shifts can better be accommodated by a more Lean-Agile approach.

The Lean-Agile Approach to Metrics

In Lean-Agile approaches, there are additional metrics that can be used to measure financial return or value delivered.

Lean-Agile methodologies primarily focus on delivering value to customers and improving overall organizational performance. However, there are metrics that provide insight into the financial impact of Lean-Agile practices – bridging the gap with traditional financial measures.

Here are some of those key Lean-Agile metrics – and how they relate to financial, or investment, return:

  1. Throughput
    Throughput measures the rate at which value is delivered by a team or organization. In Lean-Agile contexts, throughput can be quantified in terms of completed features, user stories, or customer requests per unit of time (e.g., sprint, iteration, or release).

    Financial Return: Higher throughput typically translates to faster delivery of valuable features or products to customers, potentially leading to increased revenue or market share.

  2. Cycle Time
    Cycle time measures the time it takes for a work item to move through the development process from start to finish. It includes time spent on analysis, development, testing, and deployment.

    Financial Return: Shorter cycle times indicate faster delivery of value to customers, enabling organizations to respond more quickly to market demands and capitalize on revenue opportunities.

  3. Customer Satisfaction Metrics
    Metrics such as Net Promoter Score (NPS), customer satisfaction surveys, and customer feedback ratings provide insight into how satisfied customers are with the products or services delivered by the organization.

    Financial Return: Higher customer satisfaction levels are often associated with increased customer loyalty, retention, and repeat business, leading to higher revenues and profitability over time.

  4. Cost of Delay
    Cost of Delay quantifies the financial impact of delaying the delivery of a feature or product to customers. It takes into account factors such as lost revenue, missed market opportunities, and increased operational costs.

    Financial Return: By minimizing the cost of delay and delivering features to customers sooner, organizations can maximize revenue generation and competitive advantage.

  5. Revenue Impact
    Revenue Impact metrics track the direct financial impact of specific features or product enhancements on revenue generation. This may include tracking revenue generated by new features, upsells, cross-sells, or increased customer engagement.

    Financial Return: By measuring the revenue impact of features delivered, organizations can assess the effectiveness of their investments in product development and prioritize initiatives that have the greatest potential to drive revenue growth.

  6. ROI for Improvement Initiatives
    Organizations can track the ROI for improvement initiatives implemented as part of their Lean-Agile transformation, such as process improvements, automation efforts, or quality initiatives.

    Financial Return: By quantifying the financial benefits achieved through improvement initiatives and comparing them to the associated costs, organizations can demonstrate the financial impact of their Lean-Agile practices and justify further investments in continuous improvement.

These metrics provide organizations with insights into the financial impact of their Lean-Agile practices and help them make data-driven decisions to optimize value delivery and drive business results.

Additional Lean-Agile Metrics Adapted to a Digital Context

Here are some key metrics that contrast the Lean-Agile approach with ROI and Traditional methods:

  1. Lead Time – Lean-Agile measures the time it takes from when a customer request is made to when it is fulfilled. It focuses on minimizing lead time to improve responsiveness to customer needs. ROI and Traditional may not explicitly track lead time unless it pertains to specific processes or workflows within a project.
  2. WIP (Work in Progress) – Lean-Agile tracks the number of work items that are currently in progress but not yet completed. With that info, it seeks to limit WIP to prevent overburdening teams and improve flow efficiency. ROI and Traditional may not explicitly monitor WIP levels unless it is expected to affect project timelines or resource allocation.
  3. Defect Rate – Lean-Agile tracks the number of defects or issues identified in delivered work. It aims to reduce defect rates through continuous testing, feedback, and quality assurance practices. ROI and Traditional may monitor defect rates but may not prioritize early detection and prevention as much as Lean-Agile approaches.
  4. Employee Satisfaction and Engagement – Lean-Agile measures employee satisfaction and engagement through surveys, team retrospectives, and other feedback mechanisms. It emphasizes creating a supportive work environment that fosters collaboration, autonomy, and continuous improvement. ROI and Traditional may monitor employee satisfaction but may not place as much emphasis on empowering teams or fostering a culture of innovation and ownership.

These metrics highlight the differences in focus and priorities between Lean-Agile approaches and traditional methods. Lean-Agile methodologies placing greater emphasis on speed, flexibility, customer-centricity, and employee empowerment.

ROI and Traditional approaches often lack the flexibility to pivot when necessary. However, having and ROI and Traditional approach perspective up front and executing with Lean-Agile processes and metrics provides a nice hybrid approach.

Strategy and Investment Metrics

Strategy has changed and evolved as a result of the rapidly changing business conditions largely due to digital technologies. This requires strategic dexterity with regards to thinking about high level strategies and implementing them in an agile way that allows for pivoting.

Traditional strategic approach, such as Michael Porter ‘s five forces, the value chain model, and three generic strategies. Although these can still provide valuable insights and are still applicable in many industries, they have given way to alternative approaches more fitting with the digital age.

Some more agile approaches that have evolved include the dynamic capabilities framework, the Rita McGrath‘s strategic agility competency, and the digital transformation strategy framework. They seek to find a new space that combines strategy and agility.

They key is that strategists develop strategies and key metrics that can guide strategic decisions with sound long-term logic and built-in flexibility to allow for discovery along the way. Project implementation similarly needs to walk this gray line between the long and near term.

Project Management and Investment Metrics

Project managers are tasked with implementing projects and need to measure progress to that end. They are need to make sure that the project is on its way to delivering the intended strategic benefits.

There are two ends of the implementation spectrum: waterfall and agile. Each requires different metrics, and much of that decision relates back to the discussion above about investment metrics.

One difference between waterfall and agile is i how they relate to strategy.

Waterfall generally takes the strategy as a given and largely follows strictly project metrics. This is the domain of ‘project progress’ metrics, primarily earned value methods. The concern there is how the progress is progressing toward completion, and how that related to time and resources spent.

Agile recognizes that much is unknown, and that the project in part is a journey in discovery. There is a strategic objective, but at the same time the exact destination or exact specifications of what t looks like, are not clear. The metrics here are a lot different – as illustrated in the paragraphs and sections above.

The reality is that most project are hybrid – a combination of waterfall and agile. As a result, project managers need to understand the spectrum from waterfall to agile as it relates to metrics, and need to custom pick the metrics that will inform the project team and stakeholders on progress toward the strategic goals.

Conclusion and Further Resources

This post examined the difference between ROI and Lean-Agile metrics, It identified the key metrics of each, and the drivers behind those metrics. Finally, it looked at the impacts of these opposing approaches on strategy and project management.

The following video by Dr. Mike Clayton of OnlinePMCourses explains ROI in detail in less than 5 minutes:

The following video – a little over 8 minutes – is from Agilemania and provides and efficient overview of Lean-Agile metrics:

Leave a Comment