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—sustainably shortest lead time, with best quality and value to people and society—requires a fundamental understanding of the economics of the system builder’s mission. Without such an understanding, even a technically competent system may cost too much to develop, take too long to deliver, or have manufacturing or operating costs that cannot support economically efficient value.
To this end, system builders—as represented by the entire chain of leadership, management, and knowledge workers—must all understand the economic impact of the choices they are making. Traditionally, the economic constraints on the systems builder’s activities is known to only a few—those decision-makers and authorities who have the understanding of the business, marketplace, and customer economics. However, centralizing such knowledge means that workers’ everyday decisions are either a) made without such an understanding, or b) escalated to those who have it. The first choice directly suboptimizes economic outcomes. The second increases delays in value delivery, which has the same ultimate effect.
SAFe highlights the important role that economics play in successful Solution development. Therefore, SAFe’s first Lean-Agile Principle is to take an economic view. It is Principle #1 for a reason: If the solution doesn’t meet the Customer’s or systems builder’s economic goals, then the long-term viability of the solution is suspect. Solutions fail for many reasons, and failed economics is a primary one. This article describes the two primary aspects of achieving optimum economic outcomes via Lean-Agile methods. These are deliver early and deliver often, and understand the economic trade-off parameters for each program and Value Stream. Each is described in the sections below. In addition, SAFe instantiates many of these principles directly in the various practices; that is the subject of the Economic Framework article.
Deliver Early and Often
Enterprises arrive at the larger decision to embrace Lean-Agile development either because their existing processes are not producing the results they need, or because they anticipate that those processes will not do so in the future. In choosing a Lean-Agile path, they are choosing a model that is based on incremental development and early and continuous value delivery, as Figure 1 illustrates.
That decision alone produces a significant, and perhaps the primary, economic benefit, as is illustrated in Figure 2.
This figure illustrates how value is delivered to the Customer much earlier in the process. Moreover, this value integrates over time—the longer the Customer has it, the more value they receive. 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. Moreover, the picture above does not even account for the benefits of far faster feedback to the solution builder, as well as the lower probability that the waterfall end delivery will actually occur on time and, even then, have fitness for use. And there is a third and final factor with the prime imperative, as is shown in Figure 3.
Figure 3 illustrates a key differentiator, so long as the quality is high enough: Things that are delivered early to market are typically more valuable. After all, if it’s early enough, it isn’t available from anyone else, and therefore it’s worth a premium to the economic buyer. Over time, features become commoditized and cost, not value differentiation, 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 for the solution builder are higher. This is the basic premise of Lean-Agile development, one that is firmly entrenched in the Lean-Agile Mindset, and one that drives solution builders to always strive for the shortest sustainable lead time.
Understand Economic Trade-off Parameters
The prime imperative discussed above drives solution builders to this more effective economic model of delivering value more quickly. However, there is far more work to be done when executing a program, and economic decisions made throughout the life of the solution will ultimately determine the outcome. Therefore it’s necessary to take a deeper look at various additional economic trade-offs. Reinertsen  describes five primary parameters 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 (cost of goods sold), and/or deployment and operational costs
- Value is the economic worth of the capability to the business and Customer
- Risk is the uncertainty of the technical or business viability of the solution
Understanding these trade-offs helps optimize life cycle profits, the key to unlocking optimum economic value in development. But it requires a deeper project understanding. Here are two examples:
A team building a home automation system estimates that they can reduce the cost of electronics parts by $100 by moving more functionality to software, but it would delay the release lead time by three months. Should they do this? Clearly the answer depends. It depends on the anticipated volume of the product to be sold compared to the cost of delay 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 clearly reduce the near-term value delivery, but it will also reduce lead time for future features. Should they do it? Again, the answer depends; somewhat 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 solid decisions based on economics. These include:
- The Principle of Quantified Cost of Delay: If you only quantify one thing, quantify the cost of delay
- The Principle of Continuous Economic Trade-offs: Economic choices must be made continuously
- The Principle of Optimum Decision Timing: Each decision has its optimum 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: 27 April 2016