Agile Budgeting in the 2020s

When we finished the second decade of the 21^st century,  the aggregate threat of the newly arrived digital-native market disruptors had already proven to be serious enough to push some of big incumbents off the cliff and cause severe revenue losses to many others.

These large players were facing a “do or die” mandate, trying to replicate what these little foes had as the secret sauce to their success: Agility and Digital Technology. These large players have already started experimenting in trying to embrace Agile methodology and implementing Digital Transformation in all the market sectors they have presence.

Just before the second decade came to an end, while these organizations were still tackling the concept of financing Agile enterprises, and just to make things more complicated, a global pandemic entered the landscape and soon proved to be a major parameter in all of their calculations, especially their planning and budgeting.

In fact, the pandemic emphasized the reality of the new era of accelerating market changes and shifting customer demands, that had been creating the waves that the digital-native market disruptors were successfully surfing while the traditional giants where submerging under and sinking to the bottom to their demise.

This is now a proven fact that trying to follow the old ways of planning for an entire year ahead of time and budgeting for it, based on best-guesses and wish-upon-a-star ROIs, in such heavily disrupted and quickly shifting market, is a failed attempt before it even starts. 

We have arrived at a turning point in history, where organizations can no longer afford to be “Agile in name only” and if they have any intentions to stay in play, or even thrive in the 2020s, they need to change their mindset across their entire organization, especially the financial leadership under their CFOs.

We cannot expect our Agile value streams - run by our DevSecOps teams - to succeed in following the ever accelerating market changes and shifting customer demands, through rapid prototyping and short learning cycles, while we try to stick to the rigid and slow “Predict, Command, Control” model for the entire years’ budgets, and lock-in our strategic plan for an entire fiscal.

1- To embrace Financial Agility, relinquish the false dream of being in full control

The traditional way of planning and budgeting is in support of the “Predict, Command, Control” model which in the old days would provide the executive leadership with a fuzzy and warm feeling of knowing where the organization is planned to go through the upcoming fiscal year and how it is going to be budgeted for each silo and each initiative in those silos.

They would gather the needed budget requirements across all departments and operations and go through levels of trimming downs and re-prioritization and then would sum them up across various verticals and then come up with the entire budget for a whole years.

That approach was so rigid and unrealistic that even in the old and slow days that you would not see any considerable market disruption any faster that once in a few years, and customers were not connected to one another and trends would take a long time to change, they would still fail to correctly budget for all the needed work in a year, and end up missing funding for important tasks and senior executive would end up cannibalizing research and innovation budgets, in order to fund the critical costs that were missed or never had enough mitigations in place.

Executive leadership used – and many still use - the traditional “Predict, Command, Control” model as part of their plan to set an earning-per-share (EPS) goal in place. This is while research shows that less than 1% of the actual EPS is the outcome of such outdated, pain-staking practice. 

This is while accepting the fact that executive leadership cannot best-guess an entire year ahead of time and should change their focus to improving the market re-targeting ability of their value streams and productivity performance, has more than 30x that impact on rising the value of their organization.

As goes the famous military quote says, “no plan survives contact with the enemy”, the past few years have statistically shown that more than 75% of organizations had to drop their original strategic plans, several times a year, and embrace the needed changes to cope with unforeseen market changes.

Many organizations have learned the hard way that the more they try to predict the entire year, the less reliable their  strategic plans will be.

Truly Agile organizations focus on learning, adapting, and growing through short learning cycles. They stay honest to themselves that uncertainties and potential pivot points are opportunities, that would only be gained if they stay flexible and use shorter budgeting windows.

2- Agile guidelines in Strategic Portfolios turn into Fiscal Strategic Success.

Agile enterprises who have succeeded in matching their budgeting needs with the most optimized market response costs, use Strategic Portfolios as enterprise budgeting guidelines which would then cascade down to programs and then initiatives across Value Streams.

They follow Lean Budgeting, Innovation Accounting and Lean Portfolio Management practices in Scaled Agile structures that answer the following questions at each cycle:

• What outcomes are expected to create the highest value to our customers?
• What hypotheses should be proven in support of those outcomes?
• How do we quickly and efficiently measure and test the Value impact of those outcomes?
• How should the funding be distributed between those outcomes?
• How should the funding be balanced between operations (running the business) and innovation (upgrading and changing our value proposition model)?

Following this approach would reveal hidden, valuable insights with direct strategic impacts. For example, after  assessing the “hypothesis” behind the outcome of their efforts in a learning cycle, the executive leadership may discover that the best course of action,  is to opt for a lower market share on some products and redirecting the funds to research and innovation in another area.

They may discover a significant imbalance between the operations and innovations budget with the first one drying up the funding to keep the lights on at the cost of depriving the organization from any innovative, competitive advantage in the market.

This approach would also reveal the inefficiencies in the budgeting and funding approval and tracking process. Opportunities may fall through cracks due to the slowness or complexity of the process or a backlog of delayed approvals awaiting the wrong people to push them forward.

In Agile enterprises, teams, initiatives, and programs not only provide their needed funding requests at the end each learning cycle – which may be a quarter or less – they also provide a range of funding (like +/- 25%) and what they can add (or remove) as a results. This allows the management to have a broader set of parameters to use in using data analytics in making optimized decisions for the next cycle.

3- Budget in Short Windows for Long Terms and “Inspect and Adapt”.

The paradox here is to keep the eyes on the horizon and what may show up there while paying attention to the road ahead of us, a few steps at a time.

Agile enterprises use Delivery Roadmaps to create the needed connection between the Strategic, Long Term portfolio plans (“the expected Path”), and the short cycles needed to run “market pulse-checks” and adjusting the pace and the path accordingly.

This makes the Delivery Roadmap a living and breathing artifact that instead of behaving like your old, printed world map poster on the wall, is more like your Google Map on your screen. Despite its static looking features, it is actually updating itself at short intervals, using the most recent and relevant information to still provide the best and most optimized path to take.

It also allows the Agile enterprise to set an expected path, estimate its predictability with a range of hypothesized  predictions, “inspect” the validity of those hypotheses in short learning cycles, “adapt” the next cycle to achieve the best possible results and repeat the cycle.

Conclusion

The traditional planning and budgeting approach, despite its fake fuzzy and warm feeling, does not bring any better performance or outcome to the organization. It would instead create a rising “opportunity debt” with delayed funding approvals and inaccurate budgeting of teams in the innovation spearhead, leading to an accelerated loss of market share and its guaranteed financial disaster for the organization.  

Enterprise Agility as the key factor in surviving and thriving through this decade, requires the financial leadership of the organization to embrace true agility and step up the need efforts to synchronized budgeting with the short learning cycles that the value streams across the organizations have adopted as their market tracking and re-targeting approach.