The Product Owner is responsible for the Return on Investment (ROI) of the Product. In order to manage that responsibility, the Product Owner needs to estimate how much financial benefit the Product Backlog Items for a specific Sprint will generate, and compare that to the effort of one Sprint’s worth of the Scrum Team’s labor.
This calculation then allows the Product Owner to decide if a given Sprint is worth doing or if the Scrum Team should turn its attention to other work… possibly even a different product. If the Product Owner has these estimates, then it is possible for the Product Owner to maximize the ROI of the Scrum Team. When these estimates are missing, it is difficult to ensure that the Scrum Team is working on the best possible PBIs. In the worst case, the Product Owner will spend the Team’s time working on very low ROI items and cause substantial problems for the business.
The Product Owner must first be able to estimate the business value of the work of each Sprint. The Product Owner gathers information about how the product is going to benefit the business: generating new revenue, saving money or time, increasing customer retention, etc. At first, the Product Owner may only have a high-level estimate of the effects of the product, but through research and analysis that looks at historical data, market trends, and other factors, the Product Owner can get a fairly accurate picture of the product’s potential value. This overall value can then be allocated down to the detail of specific Product Backlog Items in numerous ways including points systems and spreadsheet modelling. As the Product Backlog changes, these allocations, and possibly the overall benefit, will need to be updated to reflect the changes.
The Product Owner must then also know the details of the costs associated with each Product Backlog Item. This is normally focused on labour costs as estimated by the Scrum Team. To convert the team’s estimates to monetary units, the Product Owner must find out the actual cost of the team including salaries, hourly rates, space and equipment costs, tool licensing costs, and administrative overhead. As well, if the team does not have a mature Definition of “Done”, then costs outside the team must also be considered. This “fully loaded” cost for the Scrum Team should then be used to calculate the cost of running one Sprint.
Likewise, the Product Owner sums up the value of all the Product Backlog Items for a particular Sprint. If the value is higher than the cost, then the Product Owner can be fairly certain that the work is worth continuing. If the value is lower than the cost, then the Product Owner, being accountable for ROI, should be seriously considering the option of not doing the planned work and finding something more valuable to work on or helping the team to become more effective at doing its work.
The Product Owner is responsible for maximizing the value of the product and the work of the Development Team. — The Scrum Guide
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