Take an economic view.

—SAFe Lean-Agile Principle #1

 

Economic Framework

The Economic Framework is a set of decision guidelines that align everyone with the financial objectives of the Solution and informs the economic decision-making process.

It contains four primary elements as illustrated in Figure 1:

Figure 1. The four primary elements of the economic framework

SAFe Lean-Agile Principle #1, Take an economic view highlights the critical role of economics in successful solution development. This article describes how this principle applies to the creation of significant solutions—whether they be cyber-physical systems or extensive business solutions. The economic framework also supports empowered, fast, and localized decision-making, thus aligning with Principle #9, Decentralize decision-making.

These principles come together in this article, which describes the economic framework for large-scale solution development. This framework outlines a set of decision-making considerations that aligns everyone with a shared vision for the solution and its financial constraints and tradeoffs. That includes budget considerations driven by the program portfolio, as well as trade-offs that affect a particular solution. In this context, portfolio stakeholders can delegate decision-making authority to others, knowing their decisions will align with the agreed-to economic guidelines.

Details

In large and complex systems development, thousands of small decisions are made every day by teams and by ARTs. Their choices can positively or negatively influence the economic outcomes of a solution. Without guidance, self-organizing teams will make their ‘best guess.’ This can result in decentralized decisions that are not aligned with the core economics of the system, creating the potential for technical debt, rework, waste and even lack of fitness for use.

The primary purpose of the economic framework is to address this risk by enabling fast, effective decision-making for Solution development within the bounds of the broader economic picture. This, in turn, requires three things:

  • An understanding of the rules for decision-making
  • The current local context
  • Relevant decision-making authority

To this end, many of the needed economic decision rules are embedded in various SAFe practices, but four specific areas are highlighted below.

Operate within Lean Budgets and Guardrails

Figure 2. The LPM establishes Lean budgets and guardrails for value streams and ARTs

One of the most significant transitions for the Lean-Agile enterprise is to move from project-based, cost-center accounting to a more streamlined, leaner budget process. In the new model, the funding is allocated to long-lived Value Streams that produce the Solutions vital to the organization. Once this transition is complete, the cost for each Program Increment (PI) is largely fixed, and scope is varied as necessary. Each value stream budget can then be adjusted over time at PI boundaries, based on the relative value that each provides to the portfolio. This process is described further in the Lean Budgets article.

Guardrails inform the oversight and governance that guide the creation and management of Lean Budgets. They provide the budgeting parameters with degrees of freedom that Solution Train leaders use to deliver innovative, competitive solutions. Examples of guardrails include:

  • Defined investment horizons
  • Capacity allocation
  • Approvals and metered funding
  • Ongoing business owner engagement

 

Clear guardrails provide Lean Portfolio Management (LPM) fiduciaries with the ideal combination: the ability to respond to market needs while maintaining financial discipline. For a more detailed discussion, read the Guardrails article.

Every solution inherits the constraints of the corresponding value stream as defined by the LPM. Solution Train and ART leaders made decisions on the definition, scope, and sequence of capabilities and features within the boundaries created by Lean Budgets and Guardrails. These guidelines must be periodically revisited for updates, typically at every PI boundary as a minimum.

Understand Solution Economic Trade-offs

Figure 3. Every economic decision can influence multiple variables

Within the degrees of freedom provided by Lean Budgets and Guardrails, there are still many alternatives for what to build and how to build it. Principle #1, Take an economic view references some of the foundational concepts described by Reinertsen regarding what to use when considering trade-offs among competing design alternatives. The five elements of Reinertsen’s model (illustrated in Figure 3) include:

  • Development expense – the cost of labor and materials required to implement a capability
  • Lead time – the time needed to implement the capability (‘Cycle time’ in Reinertsen’s work)
  • Product cost – the manufacturing cost (of goods sold) and/or deployment and operational costs
  • Value – the economic worth of the capability to the business and the customer
  • Risk – the uncertainty of the solution’s technical or business success

The arrows in the diagram in Figure 3 are the key to the model. They illustrate that changing any variable can have an impact on one or more other variables. For example, a company can add developers to an initiative that’s behind schedule, but that will also increase the development cost. And if the product cost goes up, that may affect profitability or pricing. Understanding how each variable influences the other variables is vital in order to reason through trade-offs such as backlog sequencing, scoping capabilities, and sizing (numbers of teams) of ARTs and Suppliers (to adjust capacity) against the underlying risks associated with each alternative.

Leverage Suppliers

“End the practice of awarding business on the basis of price tag. Instead, minimize total cost. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.”

— W. Edwards Deming

Figure 4. Large solutions typically depend on one or more external suppliers

Most organizations building large solutions depend on external suppliers to augment their internal workforce, or to provide components within the system-of-systems. Since the money directed to external suppliers usually represents a significant percentage of the overall cost of the solution, decisions regarding suppliers are a critical component of the economic framework.

There are two primary reasons for engaging suppliers in solution development:

  1. Insufficient workforce capacity. In this case, outsourcing may be more cost efficient if the need is temporary since it can be expensive and culturally damaging to hire and then release workers.
  2. Availability of specialty components resources, or skills sets. Another common reason is to access scarce skillsets that can be provided by a specialty supplier. In other cases, a supplier may provide a hardware or software component needed for the solution; it may be significantly more economical to buy the component and integrate it versus building it.

An essential part of supplier economics is the relationship between the buyer and the supplier:

  • Some relationships are transactional in nature. In a transactional relationship (purchasing off-the-shelf parts or components from a third party or routine staff augmentation) favorable economics may be achieved through competitive pricing.
  • Some relationships are partnerships, persistent and long-lived, where the buyer and supplier are co-developing the solution. In this instance, economic considerations are clearly being driven by longer-term considerations. These may include residual licensing, implicit knowledge, ownership of intellectual property, or other considerations that recognize the dependence on the specialty knowledge the supplier brings to the table.

In either case, as Deming notes the most favorable economics are driven by longer-term considerations, mutual trust, and relationships where supplier and buyer each have favorable economics (for example, see Agile Contracts for more detail).

In yet other cases, the best economics can be achieved through mergers and acquisitions of companies that have long-term strategic value to the solution and to the competitive landscape of the market.

For further guidance on how to incorporate suppliers into solution development read the Suppliers article.

Sequence Jobs for Maximum Benefit

Figure 5. Weighted Shortest Job First (WSJF) is the recommended technique for economic sequencing of the backlog.

To increase the effectiveness of the solution, every significant program has a host of new backlog Features and Capabilities, just waiting to be implemented. However, SAFe is a flow-based system. Its economics are optimized by job-sequencing rather than theoretical job return on investment (or worse, first-come, first-served job selection, loudest voice, or other historical patterns). In a flow-based system, picking the right next job is where the most economic benefit lies. Program and Solution Kanban systems and the Program and Solution Backlog holding areas enable this. To minimize the cost of delay (the cost of not releasing a feature or capability to market), jobs are pulled into implementation based on Weighted Shortest Job First (WSJF). Using WSJF to prioritize the backlog ensures that the highest value is delivered in the shortest lead time.

Practices Provide the Form. People Make the Decisions

This article described the constructs for economic decision-making, the comprehensive foundation for effective management based on the economics of building large solutions. SAFe also defines the roles and responsibilities of people in the decision-making chain. However, those decisions don’t make themselves. Lean-Agile Leaders with the relevant context, knowledge, and authority make content decisions at each level of the Framework—particularly Product and Solution Management. Of course, they don’t act alone. They work with their larger stakeholder community to determine the best path. But in the end, the decision is theirs. That is their primary responsibility and authority. The concepts of the economic framework ensure responsible decision-making happens throughout the development organization, bringing the full economic benefits of Lean-Agile development to the entire enterprise.

 

 


Learn More

[1] Reinertsen, Donald G. The Principles of Product Development Flow: Second Generation Lean Product Development. Celeritas Publishing, 2009.

Last update: 17 September 2018