Story Points are relative value of user story. They describe the value that the story provides when completed to Business. Estimated Hours on the other hand are the hours it takes for the Team to complete the User story - to confirm to the "Definition of Done".
For example, you can use three buckets for user story points: Large, Medium and Small. You have to quantify these Large, Medium and Small. Let us say if Small is given a value of 2, Medium is approximately double the small so it would be around 4 and Large would be double that of Medium so it would go with 8. There must be consistency in these stories under Large, Medium and Small - which means that all Small stories will be of similar efforts. It also means that a Large story would take the similar effort of 4 small stories.
Let me illustrate this with an example. You have an IT Project where user stories exist for Masters, Transactions and Reports. In each of Masters, Transactions and Reports, you have Large, Medium and Small user stories.
Log In to the system - say Medium so 4 points.
User Registration - say Large due to integration of internal and external users - 8 Points.
Forgot Password - small user story of 2 points.
Report on logged in users - Medium so 4 points.
Master detail report pulling data from one master and multiple transactions - Large so 8 Points.
For each of the user story, the team member who will be working on that story, will provide the estimates. User story is broken down into Tasks and tasks are estimated in Hours of effort required to complete them.
User Registration - 10 hours effort, story value is 8.
HTML Page design - 4 hours
Validations - 4 hours
Database Insert - 2 hours
Story Points are used to measure the velocity of each iteration. Lets say, in 1 Iteration, your team commits 4 large (4*8=32), 2 medium (2*4=8) and 5 small (5*2=10), planned velocity for that iteration would be 32+8+10=50. Suppose team completes 4 large, 1 medium and 2 small to meet Definition of Done and for remaining there are defects. So actual velocity would be 4*8+1*4+2*2=40.
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