Building an agile organization with multiple agile teams is a major challenge for executives, team members, and agile coaches. Not only do the procedures and roles change fundamentally, but also the new agile mindset requires a significant change for all involved. With all the necessary changes, one question is usually overlooked at the beginning: How does the budgeting of my teams take place within my agile organization?

In the “classic” world, a project is assigned a fixed budget in advance. The team members book their efforts on individual phases or activities in this project, while at the same time the adherence to the given budget is monitored. In an agile organization, however, we no longer think in projects but in continuously working teams. Since there are no designated analysis phases, we do not know the full scope of all activities in advance, so no overall budget can be determined. Nevertheless, even in an agile environment, the client wants to know how much it will cost to implement his requirements. Where does the budget come from? Do the teams book on user stories (US)? Does the billing take place according to Story Points (SP)? To answer these questions, we first look at the budgeting of a single agile team and then transfer this to the entire organization.

The basic requirement for budgeting a single agile team is a stable team whose members devote 80-100% of their time to the team. Each team member must therefore be “released” from other tasks so that they can fully concentrate on the activities in their team. As usual in an agile environment, all requirements are recorded in user stories and prioritized in the backlog. Their effort estimation in the form of Story Points is also common. After about three sprints, the so-called “team velocity” can be calculated. This corresponds to the average number of completed Story Points per sprint. Let’s have a look at an example:
In the 1st sprint, user stories were completed with a total of 40 story points,
in the second sprint it was 50 Story Points, in the third sprint 60 Story Points. In total, there are 150 Story Points in three Sprints, which gives a “Velocity” (average speed) of 50 Story Points per Sprint. Each additional sprint influences our velocity, which is a snapshot of the current team performance.

Velocity is an important component of our budgeting. The other component is the actual costs incurred by our team. It is important to remember that a team member spends as much of his or her time as possible in an agile team and has to give up other tasks. Under this assumption, we look at the following example:
Five people work in our agile team, each person costs 1.000 €/ day. Accordingly, the whole team costs accordingly 5.000 €/ day. A sprint takes two weeks, that is ten working days. So our team costs 50.000 €/ sprint. As calculated in the previous section, the velocity of the team is currently 50 Story Points/ Sprint. If you now divide the costs by the velocity, you get 1.000 €/ Story Point. This means that each Story Point that is implemented in this team causes costs of 1.000 €. With this value, we can now calculate the cost of each User Story by multiplying the effort estimate – i.e. the Story Points – by 1.000 €.

In practice, the process works as follows:
Depending on the budget, the sponsor decides how long he can finance the agile team. In our example, he could assign the agile team a budget of 500,000 € for ten sprints – completely independent of the content that is implemented in the team. We don’t think in terms of projects in agile. The client describes his requirements and wishes to the product owner. From this, the product owner and his team create a backlog with user stories and a cost estimate in story points. The most important requirements are right at the top.
Once the first sprints have been estimated, the client receives feedback from the team on the required implementation time for his requirements (based on the team velocity) and thus an initial cost indication.

Now the team starts implementing the highest prioritized user stories. After each sprint, the client provides feedback to the team and can adjust the prioritization, add new content to the backlog or modify existing content as needed. This cycle is repeated until one of two events occurs:

Basically, budgeting in an agile organization is very similar to that of a single agile team. However, in an organization we have several teams and the requirements are also more extensive. Therefore a further level above the user stories is needed, the so-called epics. These epics form a content bracket around several user stories and thus represent larger requirements. Epics can also be processed by several teams at the same time. Instead of determining the velocity of a single team and the effort of individual user stories, an agile organization needs to determine the velocity of all teams and the effort of the epics. It should be noted that the Story Points assigned by the team and the resulting velocity are completely team-specific and cannot be compared to other teams. This means that the effort estimate of the epics must be decoupled from the individual efforts of the user stories.

For this purpose, a single reference epic is determined, the effort of which is defined in story points with all product owners of the individual teams. All further epics are now estimated referentially to this epic. This is similar to the estimation of user stories, but with correspondingly higher values. Epics should also be implemented in a sprint, if necessary by several teams. This results in a similar approach for budgeting our agile organization as for a single team. We determine the velocity based on the completed epics in a sprint. This value includes the performance of all teams, since all teams are working on the epics. For example, we take 800 story points/ sprint. Let’s say we have five teams, each consisting of eight people. Each person costs 1,000 €/ day. So our agile organization in a sprint costs: 5 teams x 8 people x 10 days x 1,000 € = 400,000 €/ sprint. Analogous to the budgeting of individual teams, this value is now divided by the current velocity. In our agile organization, the implementation of a single story point costs 500 €. Based on this figure, the organization’s sponsors and clients can be given the cost and implementation time for estimated epics.

Finally, two notes:

Each new requirement is now broken down into Epics and estimated in Story Points. This allows the costs to be reported and allocated directly. Simple, flexible and transparent.

We often hear that long-term planning is not possible in an agile environment and that controlling and statements about effort and costs are very difficult.

The WAVESTONE approach described here is intended to illustrate how we can make statements about duration, costs, and planned content using story points, velocity, and the daily rate even in an agile environment. At the same time, we are faster, more transparent, and more honest than many estimates in the classic environment. And the best thing about it is that our agile work is not limited in any way.