In a business, agile budgeting serves two main purposes: it provides the controls needed to run the business and it directs funds to areas of priority for agile innovation.
In many companies, the usual bureaucratic budgeters usually make a huge effort to plan a budget that is accurate and strictly adhered to. Their budgets last a year or more, which means that some unproductive projects continue until their budgets are exhausted. Meanwhile, other projects queue up for the next budget cycle to compete for funding.
Agile budgeters work with a different mindset and different processes, especially in the area of financing innovation. They are able to recognise that in two thirds of successful innovations, the original concept changes significantly during the development process. They know that teams abandon some features and launch others without waiting for the next annual cycle. As a result, agile funding often resembles venture capital investment: it provides the opportunity for further exploration and the ability to purchase the necessary tools/knowledge. Their aim is not to create a complete business immediately, but to create a critical component of the final solution. This can lead to many apparent failures, but importantly, it accelerates and reduces the cost of learning. Funding decisions look similar in an agile enterprise, greatly improving the speed and efficiency of innovation.
While most agile companies still have an annual budget cycle, it is much less stressful than traditional budgeting, and managers regularly update budgets mid-year to reflect both changing conditions and information about innovation activities. This budget flexibility can be a significant advantage for firms.
Target Corp., for example, has organized its technology to fit its business capabilities and customer experience. It rewards those of its more than 250 product managers with more resources and responsibility for achieving the best results.
Another excellent example is a leading US company that offers car insurance to its customers, which recently funded several agile teams to develop a new feature: allowing customers to find cars for sale on its website and mobile app. The company's original idea was to include recommendations for cars to buy in addition to a search facility, but when the teams tested the idea, they found that customers only appreciated the search function, not the recommendations. This changed the priorities of the team and allowed one team to be reallocated to other work. In a traditional budgeting environment, the project would have been executed as planned, so much of the effort spent on developing the recommendation function would have been wasted.
Agile businesses typically follow three other practices related to innovation budgeting. These will be discussed in more detail below.
Agile budgeting exercise #1
Prioritise strategic importance, but be open also for unplanned initiatives.
The planning process should clarify the strategy and define the actions needed to achieve the company's objectives. Therefore, every company needs a prioritised list of investment opportunities. The underlying elements come from a wide variety of sources: the planning process, ideas from ongoing agile teams, new customer research, competitive analysis, suggestions from frontline employees and unexpected acquisition opportunities.
Unplanned initiatives can often warrant more funding than ideas that were once a priority in the planning process. Amazon Prime and Amazon Web Services were both bottom-up ideas outside the normal planning cycle. Neither seemed to be a strategic priority at the time, but they quickly grew in importance as their successful growth required more funding.
Agile budgeting exercise #2
Fund persistent teams rather than projects if the opportunities are promising.
There are two types of agile teams:
As customer needs change and customer solutions evolve, persistent teams will typically change direction dozens of times over the years. If they find a better way to offer a customer solution, they should follow it. (Conversely, if they don't find a good solution or the problem is no longer important, the team should move on to another problem or disband.) The longevity and empowerment of persistent agile teams make them more effective and efficient innovators as they get to know each other, their customers, and the processes and systems they use to serve those customers.
Agile budgeting exercise #3
Funding is linked to results.
Agile businesses respect results more than the age of an individual or their position within the organisation. Senior management projects are as transparent as any other agile initiative. The opinions of executives are subject to the same scrutiny as those of software developers: how can this be tested?
With funding comes also accountability. Every agile activity funded, whether it is a persistent team, a project or an unplanned opportunity, is accountable to deliver the result for the client that justified the investment in the first place. This may sound obvious, but it is surprising how many people in traditional budget systems spend months or years deciding whether a project is worth investing in, and then spend not a day determining how well the investment was made. Agile budgeting works differently. Agile constantly questions whether investments are justified, whether they are achieving the sub-objectives. Agile rewards the effectiveness of experimentation. Agile teams are fully aware that if they do not achieve their target results, their budget will be handed over to other agile teams that can create more value with their own project.
The Royal Bank of Scotland example
Of course, different companies face different challenges and each will develop budgeting procedures to suit its own needs. An example of this is the Royal Bank of Scotland (RBS), which, a few years ago, started to introduce teams dedicated to specific customer experiences. Unfortunately, RBS's traditional model of budgeting, funding and governance got in the way: on the one hand, the model was designed to fund only traditional projects. This required extremely detailed descriptions of functions, costs and outcomes - details that took a long time to produce and left teams struggling to adapt as they learned more about customer behaviour.
Another problem was that, as the teams were disbanded at the end of the project, there was no opportunity for the team members to get together and work together in the long term.
Finally, the approval process for implementing changes was cumbersome, which delayed results and prevented small changes from being tested and learned from them. RBSs’ managers therefore began to restructure their budget and funding model.
The first step was to create customer business areas (CBAs) focused on a specific set of experiences, such as buying and owning a home. Then, the second step was to create persistent journey groups within the CBAs, each focused on a specific customer experience, such as discussing a credit card charge.
The third was the design of performance agreements. Each CBA had a performance agreement, which consists of the following: in return for the resources requested, the CBA owner agrees that the CBA she/he manages will achieve results such as an increase in revenue, a reduction in costs or an increase in Net Promoter Score (NPS). Each CBA owner receives resources in return for commitments that support the CBA to achieve its goals.
Since the new system was introduced in RBS, the number of business cases developed in a year has been reduced from eighty to six, freeing up significant time and energy. RBS plans to further develop the model to ensure that funding for CBAs and travel teams is available on an ongoing basis and can be progressively adjusted as client priorities and business opportunities change.
RBS also uses a technique it calls scenario-based funding. This consists of business unit managers submitting a blueprint for innovation and investment funding and the business value they can deliver. Alongside the blueprint, managers also calculate what the project could achieve with 20 percent more funding and what it would lose with 20 percent less funding. Business unit managers use the same approach to develop their estimates and make budget allocation decisions.
The Beyond Budgeting management tool advocates changing the budgeting mindset and process with recommendations on how to change leadership and management processes in a consistent way to make the organisation more adaptable and human.
The source book for this article is Darrell Rigby - Sarah Elk - Steve Berez: DOING AGILE RIGHT - Transformation Without Chaos