Moving Away from Traditional Budgeting

At its most simple form, a budgeting framework is a means to establish where money gets spent in an enterprise. A good budgeting framework applies a demand system like an idea pipeline where ideas collect. On a regular basis, it assesses the demand based on customer value and enterprise strategy, and then it aligns the supply side to meet the demand.

In many organizations today, budgeting is a yearly affair. Budgeting starts by soliciting ideas, often referred to as projects, that are collected over a period of several months. As illustrated in Figure 19-1, some high-value ideas may have already been in the demand pipeline for up to six months prior to the budgeting cycle. Then the idea waits another three months for the budgeting cycle to identify and prioritize ideas, another month to get approved, and yet another three months waiting to get pulled by a team since their current workload is full for the next three months. That means a high-value idea may wait for upward of 12 months before it gets worked on.

Figure 19-1. Traditional budget process—many wait states

Traditional budgeting frameworks may have many high-value ideas sitting in the pipeline for upward of a year before work begins. If you are familiar with value stream mapping that highlights the wait states in your process, you will find that in a traditional framework, ideas are waiting around during the majority of the process. You literally cannot afford this approach.

If you understand the marketplace well enough, you may realize that a high-value idea a year ago will not have the same level of value now that it had then, and it may completely miss the market window. Additionally, even if you proceed with the idea, you may miss the peak of the total opportunity as a competitor may get there first, resulting in your market share opportunity being much smaller. This is why you need an Agile budgeting framework.

Why Agile Budgeting?

The overall theme of Agile budgeting is for an enterprise to use its money more wisely as it adapts to customer needs and the marketplace. This starts with having an enterprise idea pipeline and stakeholders that readily accept and evaluate ideas as they enter the pool of ideas in the Reveal stage. This effectively eliminates the annual budget process wait states that can make an idea irrelevant and it helps you optimize the flow of getting the idea to market much more quickly, as illustrated in Figure 19-2. In effect, Agile budgeting is an adaptive and continuous budgeting framework.

Figure 19-2. Agile budgeting framework—reducing wait time for high-value idea

Figure 19-2 highlights that not only will you get the idea to market up to 12 months earlier than the example in Figure 19-1, you will also much more likely hit the market window and get a bigger market share, resulting in more revenue for your enterprise. Comparing the traditional budgeting process shown in Figure 19-1 to the Agile budgeting framework shown in Figure 19-2, from “Record the Idea” to “Pull for Work,” not only will you get the idea to market 12 months earlier, you may also actually deliver the high-value idea six months before even starting the work if using the traditional approach.

Value-Driven Supply and Demand

As you look across your 5R model, the Record and Reveal stages represent your demand side while the Refine, Realize, and Release stages represent your supply side, as illustrated in Figure 19-3. The enterprise idea pipeline is the pool of ideas in a rank order that comprises your demand, and teams comprise the supply of those who can work on ideas.

Figure 19-3. Supply (teams) and demand (enterprise idea pipeline)

In a more traditional budgeting framework, a team or division has a fixed budget and supply. If that division or team runs out of high-value work, it pulls lower-value work. If teams are not lightning-bolt shaped (see the following section), then they can only pull the work they are capable of doing.

If no work is coming from the enterprise level, then these teams may create work that is often lower value than what is in the enterprise idea pipeline. The flip side is that if teams have been given their supply of work following a traditional budgeting process, they are often not available for any incoming high-value work from mid-year as their backlog is full from the work given them from the annual budget.

A more customer-value-based approach is to pair the Agile budgeting framework with the enterprise idea pipeline and lightning-bolt-shaped teams. The advantage is that you can use these concepts as a way to ensure you align the people and teams (in other words, supply) with the most valuable ideas (that is, demand) on a continuous and flexible basis.

Imagine a scenario where the enterprise idea pipeline has a number of very high-value ideas waiting in the pool during the Reveal stage. As part of the Reveal stage, it is discovered that the top idea requires the help from three teams to work on that idea. When you look at the capacity of those teams, the third team is full and cannot pull any more work in.

Now you have two choices. You can ask the third team to evaluate if this new idea is of higher value than their current work and, if so, gracefully wrap up or cut the tail of the work as quickly as possible. Alternatively, if you see that the third team is consistently the bottleneck to pull in high-value work, then maybe it is time to add people to the team or create another team that can fulfill that type of work.

The benefit of having an enterprise idea pipeline is that you can visually see high-value ideas waiting in the pool (demand) and the utilization of teams (supply). The benefit of having an Agile budgeting framework is that you can actually do something about it. You can move budget to the teams that have more high-value work flowing their way and reduce low-value work.

Structuring around High-Value Ideas

The primary theme behind an Agile budgeting framework is to use your money more wisely by enabling effective investment decisions. Investment decisions should focus on matching the highest-customer-value idea (demand) with the earliest possible moment a team can work on it (supply).

A portion of an enterprise’s investment will focus on running the business activities such as maintaining an enterprise’s critical business operations along with maintenance and support. Hopefully, a greater portion is spent on investing in ideas focused on growing existing products and services and ideas focused on transforming and innovating the business. An Agile budgeting framework considers all three areas (run, grow, and transform).

Your goal should be to have all teams working on the highest-value work. However, it is not unusual to see some teams working on low-value work. Keep in mind that demand, whether in the form of ideas, features, or bug fixes, will typically outstrip supply, which is the teams that do the work. Because there will always be lots of “work,” it is important to ensure that the work that your teams are doing is, in fact, of the highest value.

You do not want to wait until the end of the year to realize that a team or whole division is working on primarily low-value work. A traditional budgeting framework has teams work through the annual backlog of ideas as new high-value ideas wait on the bench, as illustrated in Figure 19-4. An Agile budgeting framework gives teams the ability to pull in the highest-value ideas so all teams are working on high-value work.

Figure 19-4. Moving from a mix of value work (low, medium, high) to all high-value work

If it is clear that a team or division is the target for a lot of high-value work, then it behooves the enterprise to invest more in those areas by adding more people or teams in that area. Inversely, if the enterprise idea pipeline consistently highlights low-value work for a team or division, it may be time to invest less in those areas or adapt their skills toward the high-value work.

Components of an Agile Budgeting Framework

An Agile budgeting framework is a system that allows you to adjust investment toward high-value work in a timely manner so that high value gets to customers quickly. While called budgeting, Agile budgeting is more than this as it emphasizes optimizing for customer value over management hierarchy and organization structure.

Since enterprises range from very small to very large, how you might implement Agile budgeting will vary according to your context. Given the complexity of an enterprise, the intent is to tailor it to fit your enterprise. Here are the components of an Agile budgeting framework, as illustrated in Figure 19-5.

Figure 19-5. Components of an Agile budgeting framework

First and foremost, Agile budgeting requires an Agile mindset where you embrace adapting to the market and customer value, you are willing to adapt your enterprise list of ideas to the new highest-value idea, you apply the Agile values and principles to help you understand why adapting is a very good thing, and you incorporate customer feedback along the way.

Incremental and experimental thinking discussed in Chapter 10 is important in an Agile budgeting framework. You budget for and commit to an increment instead of a whole idea. As discussed in Chapter 2, you cannot be certain an idea is what customers want until you challenge assumptions, take an incremental approach, and gather customer feedback. If the increment is of value, the next increment gets budgeted.

Feedback thinking as discussed in Chapter 10 and customer feedback loops as discussed in Chapter 14 help with guidance for the Agile budgeting framework. This ensures you validate the increment of the idea with customers to ensure you are moving in the direction of customer value.

You need an enterprise idea pipeline or something like it, as discussed in Chapter 11. It requires methodical discipline that involves capturing the idea in a easy-to-read form such as a canvas, as described in Chapter 13; prioritizing the idea using a value-based method such as cost of delay (CoD) and CoD divided by duration (CD3), both described in Chapter 12; and challenging assumptions of the value, as described in Chapters 2 and 12.

You need to have the key stakeholders as owners of value and strategy. They should be educated on your form of enterprise idea pipeline, value-based methods such as CoD and CD3, and incremental and experimental thinking. They should also understand how to effectively challenge assumptions. In addition, you need to have lightning-bolt-shaped teams that are able to work on several skills and that have experience to work on a variety of work.

You need to have periodic sessions to curate the new high-value ideas as they come in. Each session is an opportunity to ensure you are appropriately investing in the right areas according to customer value and strategy. This may involve challenging assumptions of the idea and determining the disposition. Those that are low value or below the level of having the supply bandwidth of pulling the idea into the Refine stage can be passed for now until such time that it becomes the next highest-value idea.

Those Involved with Agile Budgeting

Agile budgeting requires an enterprise to turn its big upfront, event-driven process into small incremental and continuous sessions. This can be a significant shift for some organizations since it moves concerted effort from one part of the yearly calendar and spreads it out across the year.

There may be a shift of roles and responsibilities in implementing an Agile budgeting framework. The key stakeholders involved with Agile budgeting are the owners and stakeholders of value (for example, product owners) and senior management as the owners of strategy. This group may be called the Agile budgeting team or whatever term suits your enterprise. Avoid any terms with existing baggage.

If there is a portfolio management team, its responsibilities may move away from decision making and instead focus on enabling Agile budgeting by collecting data to gauge customer value and sharing it with the Agile budgeting team. A portfolio management team can help those evaluating an idea and its value by considering strengths, weaknesses, opportunities, and threats (also known as SWOT) as well as focusing on the trade-offs of comparing ideas that may increase revenue, protect revenue, reduce costs, and avoid costs as discussed in Chapter 12.

If there is a project management office, the responsibilities may move from ownership of the work to enabling Agile budgeting focusing on dependency management among the ideas. The key take-away is that the decision makers of a customer-value-driven approach, the owners of value, become the drivers of an Agile budgeting framework.

Avoid making a new idea the highest priority because someone says so. An Agile budgeting framework attempts to avoid prioritization based on HiPPO (highest paid person's opinion), as discussed in Chapter 12, where a senior manager makes priority calls based on his or her opinion. This can lead to chaos and a lack of understanding where the higher-value work resides. While the Agile budgeting framework helps you more quickly course-correct toward customer value, it can be prone to chaos if many course changes occur with little discipline in understanding customer value.

In the spirit of ownership and self-organization, as enterprises move responsibility to the level that has the most information typically across the enterprise onto teams, senior management should have more time to evaluate ideas based on value and alignment to strategy.

Lightning-Bolt-Shaped Teams

An Agile budgeting framework can initiate a need for how an enterprise is structured and how employees are educated. Since customer value changes over time, it requires an enterprise and its employees to adapt to that change. The goal is to be able to move the high-value work readily and quickly without extensive reorganizations of the enterprise. The key is to avoid overly rigid and inflexible enterprise structure.

An Agile mindset focuses on optimizing for customer value rather than for the rigidity of enterprise structure. This is why concepts like holocracy, discussed in Chapter 8, can help make enterprise structure more adaptable to customer value. Organizing by team vs. division may provide some insight on how to create an Agile enterprise. Avoid reorganizing arbitrarily when value is focused in another division. Any organization change should be methodical and based on customer value data.

While reorganizing an enterprise can help it align to customer value, another approach is to extend team skills so that you can experiment with and apply the “move work to the team” approach. This advocates an investment in building lightning-bolt-shaped teams willing to learn more. These are teams where each team member has a primary skill, secondary skill, and tertiary skill as it relates to the work.

The shape of a three-pronged lightning bolt has one spike going deep (primary skill) and at least two additional spikes of lesser depth (secondary and tertiary skills), as illustrated in Figure 19-6. The purpose of having various depths of skills is for the team to be able to handle a broader range of work and for team members to be able to step up and fill gaps that other team members may not have or need help with.

Figure 19-6. Infusing teams with a lightning-bolt set of skills

To create a lightning-bolt-shaped team takes an investment in education to instruct each team member in a secondary and tertiary skill. For example, developers have a primary skill of programming code. As a secondary skill, they learn how to build database schemas and, as a tertiary skill, they learn to write unit tests and run test cases. As another example, developers have a primary skill of programming front-end user interfaces in HTML and JavaScript, a secondary skill programming API routines and protocols, and a tertiary skill writing back-end applications in Ruby and Python.

The long-term benefit is that if the team members can develop additional skills, there is a greater likelihood that a team can work on a much wider range of ideas while being kept together longer, allowing the organization to gain the benefits of a high-performing team. This can reduce disrupting high-performing teams and increase the ability to build high-quality ideas.

Guidance to Tailor Your Framework

Agile budgeting requires an enterprise to turn its big upfront, event-driven process into a small, incremental, continuous process. This can be a big shift for some organizations. It is best to avoid a big-bang approach when moving to an Agile budgeting framework. If you have an annual budget process that is being used, it is best to pick the next quarter to get started. In this first quarter, allow yourself the three months to experiment with an Agile budgeting framework and tailor it to your enterprise.

Review the “Components of an Agile Budgeting Framework” section and use the time in this first quarter to experiment and set up the framework. Remember, since your enterprise size and complexity is unique, how you might implement Agile budgeting will vary according to your context.

In this first quarter, introduce education for key stakeholders as owners of value and strategy (Agile budgeting team) on what is Agile budgeting, including the Agile mindset focusing on getting to customer value and the Agile values and principles. Conduct a separate session on incremental and experimental thinking with a special focus on challenging assumptions, Cost of Delay (CoD), and CoD divided by duration (CD3). This session should include discussions on feedback thinking and establishing customer feedback loops to validate customer value along the way.

Introduce the enterprise idea pipeline and the way you plan to capture the idea (for example, canvas) and value (for instance, CoD and CD3). Set up your enterprise idea pipeline and decide what you plan to call it within your enterprise context. This setup includes moving your current-and-not-yet-acted-upon ideas to the board that makes up your enterprise idea pipeline.

With a small group, preferably product owners, attempt to calculate a CoD and CD3 value for each idea. Include a list of assumptions used to calculate CoD and CD3. Once you complete this with a subset of ideas (less than 20 ideas), share with the Agile budgeting team.

Set up a working session with the Agile budgeting team to walk through each idea in a rank order according to the CD3 value score. Share your assumptions. Ask the Agile budgeting team to use open-ended questions to challenge assumptions. These may include the following: What led you to that conclusion? What do you think the level of uncertainty is? What is your riskiest assumption? and What information do you need to validate this? This last question is critical and can help you consider the focus of your first increment of an idea and feedback loops to help you validate customer value. This is the time to wrestle with and understand this framework.

As people challenge assumptions or present the value scores, listen for people attempting to get their ideas in their area or division to have higher value scores. This is where the mindset of focusing on customer value becomes important. The objective is to optimize for the greater good of the enterprise and not sub-optimize for a particular division or individual.

After a couple of sessions with the Agile budgeting team, you will have an updated list of rank-ordered ideas according to value where assumptions have been challenged. Now start the ignition of the Agile budgeting framework. Share top ideas with teams that would work on the ideas. This is the transition from the old framework to the Agile budgeting framework. Ask the team(s) when they think they can pull a high-value idea, cut an increment, and begin validating the customer value.

What you may encounter is that the some teams have a backlog of ideas and work that is overflowing. The POs of those teams will need to make value calls as to what is more important—the existing work or the new work. Often you may find that the existing work, while deemed important, has a lower value than the new work. Expect healthy debates.

Cadence for Curating Ideas

Once you have a good handle on your Agile budgeting framework and have tailored it to your enterprise, it is time to begin a periodic cadence for curating the ideas. Identify a schedule to hold the Agile budgeting sessions based on the pace of ideas coming in. While many ideas may come in, a healthy session evaluates just the higher-value ideas, as these are more likely to be worked in the near future.

You need to identify the owners of value and strategy (that is, the Agile budgeting team). You may find there are more people in the session that are necessary. If possible, you need to keep the participants to fewer than 12 who can speak. Otherwise, the session can become unwieldy.

These sessions are an opportunity to ensure you are appropriately investing in the areas according to customer value and strategy. Ideas that are of lesser value can be passed until they become the next highest value. These sessions also provide an opportunity to view the measures that help you maintain a healthy Agile budgeting framework. Agile success measures are discussed in detail in Chapter 20.

Do You Invest in the Highest Value?

An Agile budgeting framework is more than just a budget process. It is a mindset that embraces incremental, experimental, and feedback thinking; lightning-bolt-shaped teams; an enterprise idea pipeline prioritized by customer value; and validated by feedback loops. This enables you to adapt to the changing demands of the customer and marketplace. Equally important is that you can get your idea to market a lot quicker by avoiding the wait states that a traditional annual budgeting process presents.

As markets change and new markets emerge, do you have the ability to adapt quickly toward high-value work? Do you have a flexible budget and investment framework where you can move the highest-value ideas (demand) to teams and resources (supply)? Is your framework optimized to reduce wait states and time to market to get the value to market quickly? While this isn’t easy, not doing so can make your position in the marketplace more challenging. Instead, lead with high-value, short-wait states and an Agile budgeting framework to benefit your customers and your business success.

For additional material, I suggest the following:

• Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap by Jeremy Hope and Robin Fraser, Harvard Business Review Press, 2003

• Implementing Beyond Budgeting: Unlocking the Performance Potential by Bjarte Bogsnes, Wiley, 2008