Prioritization of Investments
Unveiling the ROI, IRR, and Payback of Technical Debts and Foundational Initiatives
When it comes to investment prioritization, considering the expected return is essential. However, assessing the return on investment in foundational activities can be challenging, as the results are indirect and difficult to quantify. Still, such investments reflect improvements in team performance, reduction in delivery time, and problem-solving, resulting in greater efficiency for both the team and the software.
To assist in this prioritization, we developed a model based on the study “The ROI of DevOps Transformation”. This study provides valuable insights into calculating ROI for foundational initiatives. In this article, we will present an adaptation of this study, focusing on solving the complexity of calculating the return on investment of technical debts. Our proposal aims to overcome the common difficulties related to this issue.
Before we proceed, you must know the level of technical maturity of your team, using the 4 key Metrics of “DORA DevOps Quick Check”. If these metrics are not available, you can use the data provided in the table below. Remember that, if possible, more accurate data can be used for analysis.
ROI calculation
The study proposes the analysis of two essential data: “Net Saving” and “Investment”. These calculations play a key role in determining the final ROI. Based on this information, it is possible to accurately measure the return on investment and make more informed strategic decisions.
Cost of Unnecessary Rework Avoided per Year
This value represents the cost lost in unnecessary work, damaging the team’s productivity. It can be avoided through processes that fight technical debts and encourage continuous improvement. The calculation is obtained by multiplying the value of the team by the percentage of time spent unnecessarily on rework.
Unnecessary rework cost avoided per year =
Staff value per year (Total cost of prodtech team) *
Percentage of time spent on unnecessary rework (see Table)Revenue-generating features per year
This value refers to new features that can generate revenue and efficient return on technology investments. High-performance companies use their efficient delivery skills to conduct experiments and avoid waste in deliveries that do not generate revenue. The calculation is based on the company’s annual revenue and represents the return potential of a Feature.
Revenue generation resources per year =
Success rate of the idea (percentage of Ideas that have expected results based on the Initiative) *
Idea Impact (Revenue contribution percentage per Feature is generally considered 1%) *
Time recovered and reinvested in new features (time retreated and reinvested in New Features) *
Business size per year (total value of annual revenue that the dedicated team impacts)Cost of Downtime per year
It is the cost caused by the unavailability of applications, which directly or indirectly affects the customer, whether a partial or total degradation. This cost can reach millions of reais per hour, depending on the line of business (financial institutions are most affected). Reducing or avoiding this cost is very valuable for companies. High-performance teams can quickly restore services and design resilient services to avoid downtime. Technical debts, such as legacy applications, aggravate the difficulty of restoration.
Cost of Downtime per year =
Frequency of annual deployment (check Table) *
Annual failure rate (checking Table) *
Average time to restore (check Table) *
Outage cost per hour (Total Service degradation cost per hour)Adding these three values, we come to the potential return known as “DevOps Net Saving” of their respective team. This thorough analysis provides an in-depth understanding of ROI (Return on Investment) and enables more accurate strategic management of technical debt investments. With “DevOps Net Saving” in hand, you will be able to make informed decisions and direct resources efficiently, maximizing the benefits for the team and project success.
Devosps Net Saving =
Cost of Unnecessary Rework Avoided per Year +
Revenue generating features +
Cost of Downtime per yearThe investment in the initiative is also important to be considered, it is based on the total value of time and cost of the team, multiplied by technical investments such as training, licenses, infrastructure cost, etc.
Investment =
(Cost personnel in months *
Time dedicated in months) +
Technical researchPayback in Months is the period required to recover the investment in an initiative or project, calculated in months, we can get from the formula:
Payback in months = Investment / (Potential Return) * 12It is also possible to calculate the ROI, based on financial analysis that plays a key role in assessing the success and effectiveness of an investment based on investment and potential return.
ROI = [(Potential Return - Investment) / Investment] x 100The IRR calculation is a measure that assesses the return on investment over a period of one period. For more accurate results, it is recommended to use the XIRR formula, which takes into account the total monthly profit, costs, and earnings for each month. This formula is extremely useful to calculate the return on investment more realistically.
Here is a practical example to illustrate the concept: imagine an investment of R$96,600.00 over 6 months, with gains of 50% from the 3rd month and 100% from the 6th month.
Through the XIRR calculation, we can analyze the performance of this investment over time and obtain a more accurate estimate of the financial return. This approach takes into account the variations in gains and costs in each period, providing a more comprehensive view of ROI.
Using this powerful analysis tool, you will be able to make more informed and strategic decisions in your investments, maximizing the opportunities for financial success in your projects.
Based on the following projections.
Based on the analysis and calculations presented, you will be able to calculate the cost and return of your foundational initiatives, enabling accurate assessment of ROI, IRR, and Payback. These metrics will provide valuable information for strategic decision-making and efficient prioritization of technical debt investments. By using these tools, you can direct resources more assertively, maximizing results and ensuring the success of your projects. Remember to keep up to date with key DORA DevOps Quick Check metrics to further improve the efficiency and productivity of your team, expanding the success potential of your initiatives.
This article was co-created by Tiago Cardoso. https://www.linkedin.com/in/tdcardoso
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