Agile-driven products aim to deliver quick time-to-value, but the annual IT budget process wasn’t designed to serve the needs of Agile.
A 12-month view of spend commitments doesn’t jibe with the need to measure and tweak the on-going delivery of business value from Agile workstreams.
Organizations apply Agile adaptive planning practices to overcome these limitations—and then adopt agile financial planning to operationalize these practices.
Annual budgets and the old IT operating model
Annual budgeting processes are a poor fit for IT organizations that must bob and weave to evade overspend commitments and accommodate changing priorities.
First, there is the timeline—both in building the budget and the time frame it covers. An annual plan that takes months to build is out of step with the speed of the business. When business partners want to pivot spend in the timeframe of days and weeks.
Secondly, a 12-month timeframe is problematic. It takes a prescient CIO to see the state of their business a year ahead—either the challenges they will face (expanded successful initiatives, culled failing ones) or the steps to meet them.
When demand is predictable and unforeseen changes are minimal, annual budgets work fine. But that doesn’t reflect the reality of IT budgets. Consumption drives IT costs (directly with cloud services but indirectly for on-prem fixed assets), and that automatically adds variability—demand isn’t predictable.
Annual budgets and the new IT operating model
Agile practices exacerbate the budgeting challenges the traditional IT operating model has faced for decades. When organizations adopt Agile, CIO and IT leaders want to see Agile-specific budgeting capabilities: alignment to products, business support and feedback, and redirection of funds to areas that are proving successful.
Small Agile teams struggle with budgeting, but Agile at scale feels this pain more acutely. Organizations can’t rely on the annual budgeting process to fuel increasing numbers of Agile workstreams and products. The traditional IT operating model siloes investment and innovation budget into a significantly smaller bucket than its operating budget. Agile’s ongoing delivery of value into each product bakes in innovation and investment.
While a product is part of the portfolio, it’s always in innovation mode. Agile budgeting must switch the financial lens from a project start-project stop to one delivering ongoing value.
Three principles of Agile adaptive planning
Gartner has identified a series of internal budgeting processes that reflect the shift from project input to product outcome.
#1 Budget by product
With the value generation focus switched from project to product, it makes sense to change the budgeting focus to the product itself. This can’t be done in isolation by business stakeholders because they do not know the resource limitations for each Agile team.
Conversely, it can’t be done by the Agile teams alone because the value they are delivering (and budgeting for) may be out of sync with what business partners want. The view has to be shared by the business and the Agile teams.
A portfolio view of products provides a higher-level view of Agile budgeting. A common challenge with Agile, with its continual (and never-ending) delivery of value, is the need to keep workstreams focused on the right goals—and not be distracted by the normal turbulence (trade-offs, mistakes, poor execution) of any process.
A roll-up to a portfolio view makes it easier for business partners to keep track—without getting too caught in the weeds of individual workstreams.
A portfolio view could be a logical organizational grouping (e.g., by business unit) or a packaging of individually profitable and unprofitable products as part of a balanced product portfolio.
#2 Shared budget responsibility
Traditional budgeting processes take too long for senior-level leadership to understand the business significance of budgeting decisions. A plan made is a plan out of date once actuals hit the general ledger.
Like all their C-suite peers, CIOs need to be able to shift resources when events make past assumptions obsolete. The traditional IT operating model suffered from this lack of agility, and Agile workstreams amplify the consequences. Digital businesses cannot wait for the next annual budget cycle.
Agile teams are working with one hand behind their backs when the funds aren’t easily available during the year to meet strategy pivots. At a minimum, organizations must deliver more joint ownership of IT spend between business managers and IT teams. There is then a shared responsibility for financial and technical outcomes.
#3 Reward success
The old IT operating model, heavy with on-prem fixed assets, needed a robust business case to purchase software and hardware with long life-cycles. This made IT budget agility akin to the turning radius of a shipping tanker—slow to action and needs a lot of lead time.
Due-diligence for on-prem resources makes sense when you must live with the consequences (e.g., 3-5 years on a server array), but it’s out of step with the speed of Agile development.
On-prem supported Agile, and DevOps still needs a fixed asset footprint, but the new IT operating model is hybrid IT—on-prem is part of the soup but not the only ingredient.
Organizations win by rewarding teams that excel in delivering continuous value. And resources (people, hardware, software) need to be quickly reassigned to satisfy the need for agility. IT rewards success by offering up fewer oil tankers and more speed boats.
A collective of Agile teams parses the budget into smaller chunks for Agile development. These smaller, independent, teams allow for quicker investment cycles and smaller budget footprints for experimentation. When they deliver value, double-down on investment. When they don’t, kill the product and reinvest elsewhere.
The focus on value, in small discrete teams, stops an invasive creep of product failure overwhelming the IT budget.
The need to course-correct product commitments is a call for automated budgeting adjustments. Changed conditions and new priorities are too complex to manage by hand. IT financial managers need processes and tools that can apply this conditional logic automatically to make the necessary financial adjustments under their oversight.
Operationalize Agile adaptive planning
With the short-comings of the annual budget, organizations are operationalizing Agile adaptive planning by transitioning to a rolling, 12-18-month budgets that provide flexibility to reward success and respond to changing priorities—all while controlling costs.
According to Forrester, organizations adopt Agile financial planning by allocating their budgets into three buckets: innovation bets, minimum viable products (MVPs) for Agile product/solution delivery, and ongoing ops and maintenance investments for day-to-day operations. The bias to MVP over maintenance becomes more pronounced as the transition from legacy to digital platforms becomes more mature.