Wednesday, August 8, 2012

Agile and DCF

In my musings about agile, one advantage is that benefits come quicker, and therefore are less susceptible to the risks of future uncertainties, since the future is more uncertain than is the near term.

If benefits are monetized by cash flow, then finance guys have a term for cash benefits subject to the risk of time: discounted cash flow, DCF.

So what is DCF and how does it work? (You can find more about this in my posting at PMHut) In a few words, the idea of a 'discount' is to value less a benefit in the future when compared to a like benefit in the present -- the financial equivalent to a bird in hand vs a bird in the bush.

The future is where uncertainties lurk. The so-called 'cone of uncertainty'.  It's just not a deflated dollar; it's also market uncertainties, the varagies of customer delight, and competitive effects.

What's the Agile connection to DCF? Answer: incremental deliveries, each with some value to the customer or the business, and each delivered a little bit earlier than waiting til the end. Thus, more timely means less risky; thus, less discount.

I covered this in detail here: