Agility in Finance

The Imperative To Change Budgeting And Cost Management

• Revisiting the Purpose of Budgeting
  • The purpose of budgeting is to direct financial resources in a way that provides the most value for the company (e.g., creating customer delight in a profitable way).
  • Explain that budgeting can be separated into target setting (what we want to happen), forecasting (what we think will happen), and resource allocation (what it takes to make it happen). Discuss potential legal and regulatory constraints to consider before releasing a budget. Explain how traditional budgeting collapses these three purposes into a single function. Introduce approaches, like Beyond Budgeting, which suggest splitting target setting, forecasting, and resource allocation into three separate processes to achieve higher levels of adaptability and agility.
• Influence of Goals on the System
  • Goals have an important impact on the organization.
  • Show how goals create attention and focus in a company, as well as contrast how areas that do not have targets may be neglected.
• Influence of Goals on Human Behavior
  • Goals have an important impact on human behavior.
  • Explain how goal setting and frequent follow-up create incentives. People want to “look good” in relation to the figures they report. Ensure that goal setting and follow-up are underpinned by psychological safety to avoid sub-optimization.

Frequency Of The Budgeting Cycle

• Budgeting and Cost Management for Agility
  • A traditional, centralized budgeting and cost management approach is too slow for today’s business environment. Uncertain conditions necessitate different tools for leading organizations.
  • Show how, when budgets are set yearly and controlled on a regular basis, there is little to no room to adapt to new information. In an agile world, budgets need to be re-negotiated when insights emerge, or surprises occur. Traditional processes assume the stability and thus demotivate change that might occur during the budget cycle. Budgets should be (re-)negotiable frames based on learning rather than goals.
• Shifting from Fixed Budgets to Incremental Funding Allocations
  • Fixed budgets are established by an annual process and are intended to control costs at an aggregate level. Activity-based budgets allocate funds based on and according to the parameters of specific activities.
  • Illustrate the need to move from big, infrequent, and imprecise budget decisions to frequent, small, and adaptable decisions. Describe the associated need to create three separate processes around target setting, forecasting, and resource allocation.
• Adopting Continuous Financing
  • Financing approaches need to align with organizations’ product development and service delivery as the organizations adopt continuous delivery.
  • Introduce the key ideas behind continuous delivery (for products or services) and describe how financial processes can evolve to enable, and not inhibit, continuous delivery environments.

Targets, Forecasts, And Resource Allocation 

• Effective Financial Targeting
  • Targets represent our current idea of a desired position. In a complex world, things can and will change, and targets need to adapt accordingly.
  • Provide examples of how to formulate ambitious and relative financial targets. Describe the supporting process for achieving these.
• Effective Financial Forecasting 
  • Forecasts represent what we think will happen in our business. They should focus on indicators around desired outcomes.
  • Show why forecasting should be data-informed and not rigid/political. Explain why forecasts should only have enough detail to support decision-making. Explain how business assumptions get translated into experiments and forecasts and that forecasts are experiments based on probabilities.
• Effective Resource Allocation
  • Financial resource allocation should be dynamic and informed by targets and forecasts.
  • Illustrate how to move towards rational spending decisions by ensuring that resource allocation is responsive to the dynamic nature of forecasts and targets. Provide examples of how spending allocation decisions can be adapted to emergent situations.

Budgeting To Create Customer Value

• Comparing Funding Approaches: Projects, Products, and Value Streams
  • Rapid technology change is having an impact on the way organizations deliver value. Large traditionally-delivered projects are becoming the exception. Modern organizations must consider different delivery modes that enable the rapid delivery of value to clients.
  • Outline the three main delivery approaches:
    • (1) project,
    • (2) product/value stream and
    • (3) no project.
  • Discuss these approaches using examples or exercises that clearly outline how different modes deliver value. Explain the need to have a harmonic co-existence of non-dynamic and dynamic parts in the company and the common practice of blending delivery approaches.
• Value Management vs. Cost Management
  • Funding is based on value and outcomes rather than fixed cost or functional area financing.
  • Explain that there will always be a tradeoff requiring a balance between demand and capacity. Articulate the imperative to find value and sustain the business. Consider opportunities to expand value generation rather than always seeking to limit cost. Identify limiting factors that may exist variably, depending on each organization’s capacities.

Budgeting Across The Product Lifecycle

• Product Lifecycle Considerations
  • Approaches to creating and managing products need to be fit-for-purpose and consider the stage in the lifecycle of the product.
  • Show how early product lifecycle stages are characterized by very high ambiguities and uncertainties in business models, customer needs, and product solutions. Contrast this with late lifecycle phases, which are generally characterized by relatively high certainty in these areas, requiring different approaches and metrics to be applied based on the context.
• Early Lifecycle Financing for Exploration
  • In early lifecycle products, the emphasis is on incremental and experimental financing. Failure is expected, and learning through failure is a key characteristic in early-stage products. Explain that exploring the business model, understanding the customer job to be done, and understanding how to create customer value are normally the primary foci in early product lifecycle stages.
  • Explain how approaches like lean startup and venture capital via investors (including crowd-sourcing) are appropriate. Focus on finding and exploring a business model that promises to be at least reasonably profitable mid-to-long-term. Explain how routing financial resources to the optimal investment item needs to be very flexible and thus lightweight. Illustrate that short cycles and rapid learning lessen the impact of failure and that appropriate metrics enable fast learning and adaptation.
• Late Lifecycle Financing for Exploitation
  • In late life cycle products, the emphasis is on efficiency and sustainability of financing.
  • Explain that in later product lifecycle stages, the business model is usually relatively stable, and thus the dynamics of reallocating money from one investment item to another is lower. Show how, at the same time, the product is often handled as a cash cow, and the focus is on optimizing investment over revenue.
  • Explain how this enables tighter financial control with the (lean) idea of continuously optimizing financial performance while keeping customer value as high as possible. Illustrate that experimentation and learning will continue but with a focus on building efficiencies. Show how appropriate metrics help learning and optimization.

Empowering Teams To Manage Finances 

• Ownership and Product Budget
  • Decision-making should be decentralized, ensuring learnings are shared. Empowered teams should be trusted to manage their own resources.
  • Explain why people need to take ownership and provide techniques that enable the entrepreneurial mindset (such as the Christopher Avery Responsibility process model, Management 3.0 Decision Poker, etc.). Present why leaders need to not micro-manage. Explain and provide examples of processes that support decentralized budget management and decision-making.
• Trust and Transparency
  • There needs to be a good and healthy balance between centralized functions and decentralized teams. This requires communication structures that enable shared learning and build trust and transparency.
  • Explain the necessity of transparency of financial data and constraints. Explain how social control can be applied in organizations as distinct from central or process control, such as an organization sharing all travel expenses rather than having a travel policy. Describe communication structures that enable team empowerment and distributed decision-making.
• Moving Funds as Needed
  • Teams should be engaged in the decisions about moving funds in response to needs.
  • Describe structures that allow teams to participate in the distribution of financial resources – optimizing funds at the organizational level. Explain how these structures support team culture, using examples such as reward systems, governance structures, recruitment criteria, etc.