AGILE VS WATERFALL FINANCIAL COMPARISON

Amit Ugle

Many IT companies are now moving towards agile software development. I would like to  help you understand why companies are adopting agile software development. The financial impact of the Agile is causing many companies to move towards agile methodology. Therefore, financial comparison of Agile vs Waterfall is a very important aspect for CIO’s now. I would like to portray 5 important reasons many IT companies are getting rid of the traditional waterfall method. I would quote some numbers from an approved research to explain the benefits of Agile over traditional software development.

1. Costs – every company wants the project to be completed within budget. Since the new product introductions are becoming rapid than ever, there is increasing need that the projects are managed withing the budget constraints. The agile methodology leads to less costs due to less documentation. Now, more time is spend on actual coding than requirement gathering when compared to traditional methodology. The agile methodology like Xtreme Programming believes in heavy customer involvement into the software development project. The programming begins as soon as the programmer jots down the user stories.
2. Benefits – The agile is more beneficial as there are less defects in the final product. Why? Because more the number of iterations, better is the product quality. The product is being tested for a number of times due to the iterations which leads to higher product quality.
3. ROI – Do we really understand the concept of ROI? In simple words, It is nothing but [BENEFITS – COSTS]. Compared to the traditional methodology, Agile delivers more benefits at a lesser cost. The higher gap between benefits and costs makes it possible for companies to generate ROI of about 7 times higher compared to the traditional methodology.
4. NPV – Net Present Value is another misunderstood finance concept? NPV is having another perspective towards ‘ROI’ after discounting the benefits at a certain interest rate. Generally, the discounting rate is the bank lending rate. NPV of agile is about 200% more compared to the traditional methodology.
5. ROA – ROA means Return on Assets. It gives us an idea whether the assets are being effectively used. In traditional methodology the assets are not used until they are scheduled for the project. This increases the idle time of the resources involved in a project. But, in agile the assets are used at the optimum level due to its iterative nature. The increase in idle time will make the project risky. Therefore, ROA will also help us to understand how risky any project is to undertake. Agile reduces the risk involved in the project by about 140% compared to the traditional methodology.

I have used Microsoft Visio 2013 to compare the financial metrics of the two software development approaches which you can find below. Many IT folks have liked this diagram and I would like to hear comments from you guys too on what you think about the visual representation on financial benefits comparison.

Let us try to understand this spider’s web I created in Microsoft Visio to understand the financial comparison of Agile vs. Traditional methodology. You can clearly see that the agile is dominating the traditional methodology in every aspect. So, are you ready for Agile?