I help mentor product managers both one-on-one and within a Community of Practice.
One of the questions this week was:
How do I calculate ROI as a Product Manager when I don’t know the cost of a sprint and my product is internal-facing only?
I want to share my answer with you all because it’s been a while since I posted, and it’s fun to share with the community.
Calculating return on investment (ROI) as a Product Manager requires a clear understanding of both the return (i.e., value delivered by the product or feature) and the investment (i.e., cost incurred to deliver that value). If you do not know the cost of a sprint and struggle with accentuating the value created, it can be challenging to calculate the ROI accurately. So we must dig to discover the value of the work we plan/do/did.
Details and Examples for Sprint Estimation
There are a few approaches you can take to estimate the cost of a sprint, and below we give an example of calculating the ROI as well:
- Use historical data: Look at the costs of previous sprints and use that as a benchmark for estimating the cost of a new sprint. This method can be beneficial if the sprint’s scope is similar to previous sprints.
For example, if a previous one-week sprint for a three-person team was cumulatively pointed at 25, that is five items sized at an average of 5 story points each. Suppose that the team bills out at $80/hr. and the sprint represents 84 hrs. of dev/test/approval, etc., time, then the cost of your sprint is estimated at $6,720.
- Estimate based on team capacity: Determine your team’s hourly rate and estimate the number of hours it will take to complete the sprint based on the team’s capacity. Multiply the hourly rate by the estimated hours to get an approximate cost for the sprint.
For example, a typical billing rate to the business for software dev and aligned team members is $65/hr. a sprint may represent 60 hrs. of dev/test/approvals, etc. For a Scrum team of 5 persons, your costs are estimated at $19,500.
- Break down the work: Break down the sprint into individual tasks and estimate the time and cost for each task. Then, add up the costs to get an estimate for the entire sprint.
For example, if a 1/2 day task represents ~$50 and you calculate that your sprint contains 80 such tasks, your costs are estimated at ~$4,000.
Your engineering leadership can provide the average software hourly bill rate. Internal development costs are known and are often used to determine if a home-grown solution can be provided to a customer free of charge as a value-add or if we need to bill for professional services.
Once you have estimated the cost of the sprint, you can calculate the ROI by comparing the value delivered by the feature to the cost of the sprint. Doing so helps you determine if the investment was worth the return, and if not, make better-informed decisions about future investments.
So we must dig to discover the value of the work we plan/do/did.
Let’s go into an ROI calculation example. It can be tricky when dealing with in-house solutions, but in my experience, there is always a way to discover and metricize the value you created!
Among the factors you influence day-to-day with your product decisions that commonly impact the bottom line of a business are:
- Revenue Growth
- Operational Efficiency
- Employee Productivity/Retention
- Customer Satisfaction
- Brand Reputation
- Risk Management
We’ll use the costs outlined in Example 2 above and create hypothetical cost-savings (Operational Efficiency + Employee Productivity) created by our work from that sprint.
- To calculate the ROI, we first need to calculate the total return from the investment and then divide it by the total investment cost.
- Total return from investment = (Time saved per week * Hourly rate of team members * Number of team members) * Number of weeks
In this case, our feature saves ancillary teams hours per week by reducing the need for manual intervention. The time saved per week is 20 hours, the hourly rate of the team members is $26/hr., and the number of team members is 50, so let’s assume we are looking at only four weeks.
- Total return from investment = (20 * $26 * 50) * 4 = $52,000
- Total cost of investment = $19,500 (as discussed above)
Now we can calculate the ROI as follows:
- ROI = (Total return from the investment — Total cost of investment) / Total cost of investment
- ROI = ($52,000 — $19,500) / $19,500 = 1.67 or 167%
The positive ROI indicates that the investment could be a good one! The ROI for this investment is 167%. So for every $1 invested in this sprint, we expect a return of $1.67.
This work helps you determine if the investment was worth the return, and if not, make better-informed decisions about future investments.
Every company has its ROI thresholds they use to benchmark ROI success. Some are 10%-20%, depending on the risk associated with the work. That 167% is an impressive ROI no matter where you go, and that’s just a four-week timebox!
Please understand, however, that ROI is not the only factor at play here. Risk, timing, level of effort, users impacted, and strategic significance also must be considered. Ultimately, investments should align with the overall strategy and goals of the company, provide a positive return on investment in technology, and incrementally increase user and stakeholder satisfaction.