Thursday, April 23, 2009

Cross - Bridging the Gap

by Brad Cross - 23 April 2009

From the feedback I've received for my technical balance sheet series, I've identified two gaps in how people understand the concept. The first gap is that this approach requires somebody to be simultaneously knowledgeable in finance and software. The second gap is that it is unclear how you can adopt some of these ideas with a very small initial investment.

The technical balance sheet ideas are simple and cheap to try out. They can help you make cross-disciplinary trade-offs about software, finance, and operations. This can involve technical people who know almost nothing about finance, finance people who know almost nothing about technical work, and business operations and project management people who may not be strong in either finance or software.

So, bridging the first gap is easy: you don't need to have a double PhD in finance and computer science in order to understand these ideas. Building software costs money, going slower costs more money, and technical debt makes you go slower. If you have a lot of assets, but those assets are over-leveraged with debt, you can end up cash flow negative with negative assets. On the other hand, if you have no debt and no assets, you also have nothing. So the other side of the equation is to build software that has high asset value. Focus on the aspects of your systems that have the highest return on investment, and do so without borrowing through shortcuts and sloppiness. The technical balance sheet is just a way to give you a mental model for thinking about the trade-offs.

This leads into the second point: this is cheap to adopt. You don't have to spend a lot of time and money to try this out. The first article on gathering metrics for technical liabilities may have been a bit intimidating because it was not clear how to create a quick balance sheet for a project unless they made a significant up-front investment. Hopefully that was cleared up in the explanation of the approach in the field guide article.

You can quickly assemble a prototype balance sheet with just a few metrics that are really simple to round up. I did this on one project in about an hour by harvesting the metrics that were already available via the coverage bundle and PMD, all of which were already running in their build.

Bootstrapping a balance sheet is not about spending a lot of time putting together a bunch of overly complex tables and metrics. You can do a few simple exercises, look at the numbers, and see if it helps you think about your trade-offs and plan of action.

As an example, on a project I was working on last year I saw that we spent 40-50% of story points on a couple areas of plumbing. After some investigation, it turned out that there was some heavyweight architecture and design in place that I was able to eliminate pretty quickly. On top of it, a lot of the code could be replaced by open source components. I also saw that that the most valuable components as far as the business was concerned were in terrible shape (bad design, lots of bugs, low test coverage.) Right away, I could see that we were over-investing in maintaining plumbing and under-investing into the parts that generate the real cash flows.

This scenario is common: an over-investment on low quality infrastructure coupled with an under-investment in the parts of the system that support the business in generating actual cash flows. The solution is to figure out how to reduce your ongoing investment into plumbing, while simultaneously focusing on how to increase your investment in the cash flow generating parts of your systems. With minimal effort, the technical balance sheet can expose where these over or under investments are. It communicates in terms everybody can understand (e.g., we get value from this area of the code, we do not get value from that area of the code.) Applying a technical balance sheet to your project can make it clear to each member of the team where their attention should not be, as well as where it needs to be, to maximize the business impact of your project.

About Brad Cross: Brad is a programmer.

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