An Economic Model of Software Development Approaches

As agile methodologies are being adopted by increasing number of organizations, there is a greater needto understand its value. This study attempts to explain the value of Agile Methodologies by introducing anew economic analytical model and using simulation techniques. The results show that uncertainty levelhas a strong effect of the level of process effectiveness. Lower level of uncertainty is associated with highlevels of project effectiveness regardless the level of pre-committed project costs and project duration.When the level of uncertainty is high, the lev~1of process effectiveness is low regardless of the level ofpre-committed project costs and project duration; and, the process effectiveness declines at a fast ratewith longer project duration and/or higher level of pre-committed project costs.Agile methodology's value-adding comes from its core values of effective communication, and startingfrom small for shorter duration. It is suitable for projects with high levels of uncertainty. In contrast, theplan driven approach, tends to increase project duration, pre-committed project costs and fails toreduce the level of uncertainty. It is only suitable for projects with low level of uncertainty.