How do you “sell” agile?

Tom Breur

18 June 2017

Adopting Agile requires change. Change is not necessarily hard, but it certainly becomes easier when you show how people’s best interests are served. For me, I try to come up with a compelling answer to: “What’s in it for me?” When you are ‘selling’ the different approach to management that Agile calls for (“servant leadership”), this can appear unorthodox. It really helps when senior managers genuinely understand how their own behavior needs to change in support of Agile, and they buy into this transition.

Personally, I love to think and convince with numbers and preferably tie those to financials. When it comes to software development, this is usually such a big cost driver that you’re quickly talking major bottom-line impact. This is good, in a way, because big dollar values easily draw management attention. One of the first discussions I like to have is: “How do you determine cost?” “And value?” After reading “The Goal” and several other books on Throughput Accounting (I love Corbett’s masterpiece “Throughput Accounting”), my thinking has evolved. When I discuss costing with financial professionals, their philosophy for calculating profit and cost is one of the first topics I like to bring up.

During Agile transformations, I have found that overcoming the limiting mindset of Cost Accounting is one of the more challenging hurdles you need to take. Cost Accounting focuses on efficiencies, and cutting costs. This typically is accomplished by lowering the cost of labor. In Taylorist thinking of the industrial age, labor costs were an important driver of profitability. Bear in mind that 100 years ago, industrial output was mostly tangible, and hence relatively easy to measure. Profit had a (near) linear relation to labor costs, i.e. units produced per cost of labor.

Nowadays, when you try to measure the value of intangible output like software, this is much harder. And profit is certainly not a linear function of labor costs anymore. Nowadays, labor costs are relatively constant, since legislation and IP considerations make companies reluctant to hire and fire on a whim. Talent is hard to find, and it takes a considerable investment to bring new hires up to speed. This is why effectiveness is driven more by output (albeit intangible), rather than input (labor costs). Unless management can be persuaded to think in such terms, I find that I struggle to convey some core benefits of looking at delivery processes in a new, more Agile way.

It is tempting, albeit misleading, to focus on cost. It is seductive since measuring the value of output is so much harder than determining costs – especially if it’s something intangible like software. And ofcourse companies don’t succeed in the long term because of frugality. They succeed because they can innovate faster than the competition. That means delivering value. No company, to my knowledge, has ever maneuvered themselves out of a competitive crisis by cutting costs. At least not by cutting costs only.

Changing the mindset from focusing on cost to focusing on value (output) is a paradigm shift. The “old” ways of cleaning up the balance sheet (from a GAAP perspective) by downsizing, outsourcing or offshoring do little to spur innovation. Agile practitioners emphasize the value of face-to-face communication, which is typically hindered by such cost-cutting measures. Yes, the CFO needs to keep the balance in check, but you just can’t innovate yourself out of a crisis by cutting costs. Instead, you need to signpost the way to growth by meeting customer needs better than the competition, as Peter Drucker has long argued.

Customers don’t care about your cost structure, only market analysts do. Analysts, btw, take a much more “forward thinking” approach to corporate valuation than accountants, do. The accounting profession is lagging behind, in that respect. Current accounting practices are poorly aligned with how we run and value companies nowadays.

As a painfully obvious example of this disconnect in reporting, accountants do not “allow” customers to be listed as assets in the books. Yet it is customary for market analysts to list a takeover price for a company as a dollar amount per customer. So analysts obviously do “think” that way, even if accounting practice doesn’t support this. At least not yet. When a company “invests” in a campaign to acquire more customers, this is seen as an investment, not a cost.

Wall Street analysts are used to “seeing through” balance statements to interpret their valuation, as different from accounting practices. Knowing how to interpret annual reports, and, relating those numbers to innovation and strategic development is the analysts’ fine art. If we can sit down and have a conversation along those lines with senior management, we are well on our way to focusing on output, rather than looking at input (costs), alone. And radically improved output is what drives innovation!