The practices outlined in this article are geared to help your organization decrease funding overhead and friction, while maintaining financial governance within your portfolio by adopting Lean budgeting. As a principle piece of Lean Portfolio Management, Lean budgeting provides the funding guideposts organizations need to stay focused on delivering strategic objectives and customer value in a more iterative and continuous manner.
7 Stages to Lean Budgeting Success
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Lean and Agile Metrics: Oh, my!
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Ag·ile (ajɘl) adj. Able to move quickly and easily.
It’s no secret that today’s digital market is all about speed: To innovate, to market, and ultimately, to value. Organizations have the ability to rapidly adapt to changes that come from anywhere, at any time. They must be Agile, but agility also requires a change in mindset.
The PMO can no longer operate in a vacuum, focused solely on delivering projects on time and on budget. Gartner says, “By 2021, 100 percent of IT PMOs that fail to focus towards speed of delivery will be relegated to legacy system oversight or disbanded.” Today, the PMO has the opportunity to add significant value to the enterprise, spearheading change management to support the organization’s digital initiatives.
“Speed of delivery” demands cross-functional collaboration as it impacts the entire portfolio. The PMO and finance must work in lockstep to ensure the products, services, maintenance, and innovation that deliver on strategy and bring portfolio value are funded at the right time.
Answering the question of where to invest comes down the ability to fund on a more iterative basis. It’s not about funding individual projects anymore; it’s about funding value stream(s), LOB(s), or product line(s). While Lean budgeting is a shift for both the PMO and finance, it presents an opportunity for better financial management and fiduciary responsibility for companies that are determined to quickly adapt to change and speed delivery to remain competitive.
For those who struggle with this concept, it may be helpful to recall the number of times a project changed within the portfolio due to new demand, shifted priorities, or modifications in the project scope, which altered funding requests. These modifications occur primarily because of plan changes. With Lean budgeting, however, the PMO can focus on results rather than a project budget because Lean budgeting is done on more regular intervals (usually in line with PI or Program Increment Planning).
Annual Planning vs. Strategic Planning
Harvard Business Review found that executives believe their organizations execute their strategy effectively less than one-third of the time. That means two out of three organizations don’t know how they will deliver their strategy effectively, even though they spend a large amount of time planning.
The PMO has an opportunity to help create portfolio budgets that cross departments and teams so they can break the cycle of failing to deliver against strategy.
The organization can spend less time on annual planning and create more adaptive planning cycles with a broader perspective that truly connects planning to delivery and performance. To do this, the PMO must be focused on strategy and results, but this is often easier said than done, because so many organizations are resistant to change, even while everything around them is constantly changing.
The Annual Planning Process
In a recent survey of 300 global executives by Bain & Company, more than two-thirds said annual planning results in weak strategy with poor capability to execute and poor adaptability to changing market conditions. Still, most organizations are used to the more traditional annual planning process that looks at the previous year’s budget and tweaks it based on what’s expected for the following year. It lays out the next 12 months of projects and the assumed resources required to execute them.
This requires teams to create detailed business cases with every imagined requirement in order for finance to forecast how much the project will actually cost. This bottom-up planning is highly presumptuous, without much thought to the inevitable changes that will occur throughout the year to derail projects, costs, resources, and timing.
Even more concerning is that many business cases have no alignment with strategy. Individual business units provide their own list of disconnected initiatives and try to align them back to strategy in order to get funding approval. This results in an exercise in justifying their own special interests against the strategy, leaving the portfolio and finance organizations with dissociated priorities that become the mechanism of creating a project budget. Once the money is committed, the team is “married” to the plan, focusing on completing the project so they can spend the money, regardless if it brings value or not. This cycle continues year after year.
In annual budgeting systems, funding decisions are project-based, meaning budget is allocated on a per-project basis. Business units present their ideas to the PMO in an annual planning meeting. IT provides cost and time estimates and executives prioritize funding based on perceived value delivery. Then, teams are formed and eventually start working. With governance tied to an approved plan, teams are incentivized to stay on track towards delivering the agreed-upon plan and are measured according to project completion and how well they are able to stay on budget and on time.
This structure results in deep inefficiencies across the organization:
- Project-based funding requires creating detailed plans based on difficult-to-make projections, which takes time and people away from actually delivering value
- Planning on an annual basis creates a state of perpetual administrative overload, which decreases productivity, morale, and throughput
- Organizing temporary teams around projects (moving people to the work) results in less predictable working groups and work delivery
- Because governance is tied to an approved plan, teams are incentivized to stay on budget and on time, instead of driving actual business outcomes or increasing customer satisfaction
Annual planning, therefore, is a largely inaccurate, inflexible and inefficient process, but there is a better way that is gaining momentum. Gartner believes that if organizations want to speed delivery and scale digital business, they need a more Agile approach to planning and funding to support the continuous delivery of incremental value by the Agile teams.
The Lean-Agile Approach to Funding and Delivery
Funding by Value Stream: A value stream is defined as an end-to-end business process and the associated steps an organization takes to deliver customer value, or it may refer to a line of business that delivers value, typically a product or solution, to a customer. As organizations evolve, the shape of their value streams often evolves too.
For some companies, a value stream begins as a few teams organized to deliver a set or grouping of capabilities that satisfy a customer need. For others, it is truly the end-to-end value chain, from vision to value.
Regardless of how an organization is currently defining a value stream, its purpose is generally the same: To deliver products and solutions beyond potentially disjointed project-based delivery.
By aligning work and funding to product delivery, value is created and managed more effectively.
Rather than trying to fund individual projects, the Lean approach allocates budgets to value streams, with guardrails to define spending policies, guidelines, and practices for that portfolio. This allows for flexibility, autonomy, and speed within each value stream, while maintaining cohesion across the portfolio.
Long-Lived, Self-Organizing Teams: Shifting to a value stream-based funding structure means that employees aren’t shuffled around from project to project or team to team, which is highly inefficient and detrimental to morale.
Instead, they organize into self-sufficient, cross-functional teams, who work together to achieve a common goal. Organizing into value streams empowers team members to:
- Align around shared, defined goals for their value stream
- Optimize funding allocations for their value stream to deliver maximum value
- Have the autonomy to pivot at the epic level without needing to escalate to management (freeing up management’s time for more strategic work)
Where to Begin
Companies must focus on the most important things they can deliver from a strategic perspective, such as growing their customer base or improving operating capital. In doing so, they move from “how” to execute to “what” needs happen to achieve the goals. The strategy must be precise, such as growing from the current number of customers to a specific number of customers over a specified period of time.
Instead of being project-focused, the enterprise becomes outcome-focused. The bottom-up list of strategy-aligned projects is eliminated. Effort is now directed towards prioritizing epics and budgeting funds to the value stream(s) that can achieve the desired goals of the organization. Executives provide those goals, but the value stream teams decide how they will execute to achieve the outcomes desired.
The Stages to Lean Budgeting
To do Lean budgeting well, enterprise leaders must define strategic organizational goals. Defining these at the portfolio level (and communicating them throughout the organization) is critical for maintaining alignment from the bottom to the top of the organization and between value streams.
With goals established, you can begin planning the work needed to achieve them. Traditionally, teams use business cases to justify and/or prove the value of a proposed project based on its expected benefits. These types of detailed business cases aren’t necessary in Lean budgeting. As a first step toward more continuous planning cycles, Lean-Agile organizations use Lean business cases to make investment decisions within value streams.
Lean business cases are meant to articulate the expected results of an initiative, as well as what it will take to achieve those results.
Once Lean business cases and their represented epics are drafted and sized, they are ready for a different type of prioritization exercise. To truly optimize investments and resources throughout the portfolio, organizations will run different scenarios to test the logistical feasibility and practicality of various sequences. This allows them to consider various tradeoffs involved in certain sequences and mitigate risks or dependencies across epics.
Defined spending policies, guidelines, and practices across the portfolio ensure the right investments are made within each budget. These guardrails are critical to success with Lean budgeting, because they provide the structure necessary to enable autonomy, both in funding and planning work.
Program Increment, or PI Planning, which typically happens every eight to 12 weeks in Agile organizations is often when budgets are adjusted, assuming the organization is attempting to adopt a more iterative planning and funding model. The purpose of PI Planning is to coordinate efforts within value streams, aligning Agile Release Trains to the portfolio’s current strategic goals. It can help the teams within each value stream match demand to capacity, assess funding allocation, and ensure teams know the most valuable work to focus on. Since most PI Planning sessions happen face-to-face, they’re also an outstanding time to align Lean budgeting practices to a cycle or cadence.
Because progress is defined so differently in Lean budgeting, the measures used to assess are also different. Whereas traditional accounting practices might look at compliance with schedules, scope, and budgets as indicators of success, Lean budgeting measures, first and foremost, value creation: How much customer value did we create during this PI?
Finally, it’s important to periodically reassess how funds are allocated across the portfolio. This process requires analysis at both the portfolio and value stream levels and is scheduled to coincide with PI Planning. Establishing a regular cadence to assess portfolio performance and reallocate budgets accordingly is a critical part of Lean budgeting. This creates a regular opportunity to, across the portfolio, adjust investments in various value streams based on real-time performance metrics.
An enterprise-wide portfolio application allows an organization to leverage the power of portfolios for strategic plans as well as the day-to-day business. When the entire organization understands what should be achieved from the strategic plan and objectives, conflicting priorities fade in favor of cross-team collaboration to determine how to achieve the goals.
For example, the organization may clearly define the strategies of the organization and break them down into what they want to achieve (via epics) and how much they are willing to invest. The associated budgetary targets can drive a new fiduciary responsibility to allocate funding to particular value streams within the portfolio. Then, the allocation of capacity to incremental efforts is focused on the desired outcomes rather than detailed requirements that will be outdated long before delivery.
Decision-making is pushed to the value stream teams, who are responsible for delivering the epic’s features and stories incrementally. As each feature or story is released, the value (ROI or early indicator metrics) of what was delivered should be evaluated and captured as part of measuring and monitoring against strategic goals. These incremental releases may require work across teams and other parts of the organization. With a clearly-prioritized and funded portfolio that includes dependencies, it is easier to understand constraints and allocate capacity.
Lean budgeting is about offering faster delivery with improved fiduciary control through continuous planning. Instead of completing an entire project and then measuring to see if it was a good investment after all the money is spent, there is continuous and incremental measurement, monitoring, and funding across the value stream teams based on the results of the features delivered, as they are delivered.
Continuous Planning and Funding
Continuous planning and funding aligned to strategy reduces the time it takes to create an annual budget and supports finance to create meaningful financial controls focused on results and not only spend. Lean budgeting enables the organization to stop asking themselves how much a project will cost and start asking “what are our desired results and how much should we plan on investing to obtain them?” Once strategies are funded, the next question can be “how much should we allocate to each program that promises to deliver value based on corporate strategic initiatives?”
This is no longer an annual activity using outdated, detailed business cases, but a continuously monitored portfolio that uses Lean business cases, continuous investment, and capacity planning to allocate funding and capacity. In this way, executives, finance and the PMO have more predictability that the programs in the portfolio will achieve the desired results and return on the investment.
With Lean budgeting, finance and executives also gain a more real-time view of each value stream’s projected benefits and different costs, as well as anticipated ROI. They can even conduct what-if analysis with scenario planning to optimize the portfolio(s).
Lean Budgeting for Better Outcomes
Lean budgeting is a critical step in how your organization plans and funds portfolio initiatives. But it’s not the only step in making planning and funding changes.
Lean budgeting is part of Lean Portfolio Management (LPM). LPM refers to the holistic approach that enables companies to deliver products and solutions faster, improve business outcomes, and support corporate strategic objectives by rearchitecting planning and funding processes to be more incremental and continuous. Lean Portfolio Management and the Lean budgeting components are key enablers in connecting strategy to delivery, driving better business outcomes and increasing enterprise agility.