13
Establishing Lean Budgets
Traditional project portfolio approaches inhibit the flow of value because of several factors, but here are some of the most common challenges that we encounter:
- Project-Cost Accounting
- People are organized in functional silos
- Overly detailed business cases
- Projects governed by waterfall phase gates measuring task completion
If we are to operate in a Lean-Agile way, then we fundamentally need a different way to govern, which will require a mindset change at the portfolio level.
In this chapter, we will explore the following:
- The Investment horizon model
- How to move away from traditional Project-Cost Accounting to Lean-Agile budgeting
- How we can use the technique of Participatory Budgeting to help establish the funding for each Value Stream
Seeing the Horizons
The SAFe® Investment Horizon model highlights spending allocations for solutions that are created by individual Value Streams. This model is an adaption of Geoffrey Moore’s Zone to Win [1]:
Figure 13.1 – SAFe® Investment Horizon model illustrating Solution Investments by Horizon (© Scaled Agile, Inc.)
Let’s explore each of the Horizons in turn. First, we need to explain that, in Figure 13.1, each cube represents a solution and that the size of the cube is meant to relatively reflect the size of the investment in that solution.
Horizon 3 (Evaluating): You will notice that the size of the “solutions” (cubes) in Horizon 3 is smaller compared to some of the other solutions in Horizon 2 and 3 because these are experiments dedicated to investigating new potential solutions. Often, an initial experiment is defined to test the Benefit Hypothesis. The investment continues until the initiative is stopped or allowed to continue to Horizon 2. Not all solutions in Horizon 3 make it into Horizon 2. Horizon 3 investments are dedicated to investigating new potential opportunities for profitable growth in the future, typically within 3-5 years.
Horizon 2 (Emerging): You will also notice in Horizon 2 that there are only two solutions because Horizon 2 is WIP-limited. This Horizon reflects the investments in solutions that have been selected to emerge from Horizon 3. Because Horizon 2 is WIP-limited, the potential solutions from Horizon 3 are competing to be considered for Horizon 2. So, why is Horizon 2 limited? Geoffrey Moore reminds us of the following:
We have to consider how much change an organization can absorb; too much change can be very disruptive and could traumatize the organization. That’s why we need to limit the number of solutions we progress in Horizon 2 and only lay one or two eggs at a time. Horizon 2 reflects the investments in promising new solutions from Horizon 3 and these investments are anticipated to provide a profitable return within 1-2 years.
Horizon 1 (Investing and Extracting): Most enterprises that we work with will focus on Horizon 1 – that is, the current solutions that they have developed and are still developing (investing in) and those existing solutions that require little investment capital and perennially provide positive cash flows (extracting). The latter is often referred to as cash cows, a metaphor for a dairy cow that produces milk throughout its life and requires little to no maintenance.
Horizon 0 (Retiring): At some stage in the life cycle of the solution, it will need to be retired because it doesn’t generate much cash for the enterprise since it has a low market share and little to no growth. As a consequence, this solution can turn out to be a cash trap and for this reason, it is a prime candidate for divestiture. And yet, how often do we see enterprises not investing in decommissioning or sunsetting these solutions that are consuming company funds for long periods?
The SAFe® Investment Horizon model highlights the spending allocations for the solutions that are created by the individual Value Streams. That is why, in SAFe® we fund Value Streams, not Projects.
We fund Value Streams, not Projects
Traditional project-based, cost-center budgeting creates overhead and friction. Let’s explain this with a story from the real world. Please note that the names have been changed to protect the innocent!
I was working for a ferry company whose financial year was from January to December. The budgeting cycle was 3 months; it started in August and ended in October so that it could be approved by our single shareholder in November and then loaded onto the ledgers in December so that we were ready to “rock n roll” in January.
Starting a budgeting cycle in August is not great because many people are on holiday vacation; the busiest time of the year for this ferry company was the last two weeks of July and the whole of August because of the school holidays / summer vacation.
So, I never started the budgeting cycle in August and waited until September.
I would then visit all the directors in turn to ascertain their IT budget requirements for the following year. I would start with Phil, the Onboard Services Director.
Me: “Phil, have you got a few minutes?”
Phil: “What do you want?”
Me: “I need to talk about your budget for next year.”
Phil: “Seriously?”
Me: “Yes!”
Phil: “You know that we have just finished the summer season and I have no end of issues on board that I need to solve.”
Me: “I know, but we need to think about your budget for next year.”
Phil: “I can barely think about next week, let alone next year.”
Me: “I understand, but we need to have something in the budget.”
Phil: “Well, I just can’t think about it now, what do you want me to do?”
Me: “Can you make some stuff up?”
Phil: “If I make some stuff up, will you leave me alone?”
Me: “Absolutely.”
I would then seek out Jim, our Fleet Director:
Me: “Jim, have you got a few minutes?”
Jim: “What do you want?”
Me: “I need to talk about your budget for next year.”
Jim: “You know that we have just finished the summer season and now I have to plan for 30 ships to go to refit starting in October.”
Me: “I know it is a very busy time of year for you, but we need to put something in the budget for next year.”
Jim: “I am completely up to my eyes in sorting out the refit schedule that starts next month; I don’t have the mental capacity to think about next year. What do you want me to do?”
Me: “Can you make some stuff up?”
Jim: “If I make some stuff up, will you leave me alone?”
Me: “Absolutely.”
So, the cycle continued with all the other directors but at least I had a list of projects for next year! The next stop was my developers to estimate the projects:
Me: “Good news – we have a list of projects for next year. Can you estimate them?”
Developers: “Can you explain them to us?”
Me: “Nope, they are all made up.”
Developers: “So, you want us to estimate made-up projects?”
Me: “Yes! That feels like a completely reasonable request.”
Developers: “We are not doing that!”
Me: “Well, that is very disappointing.”
The only option is that I do the estimates myself, but the estimates must look like they haven’t been made up as well. So, be careful and avoid round number estimates – every estimate needs to look like it has an element of precision, so no estimates that are £750,000; rather £739,286.
Having assembled my budget with estimates in September, the next round was the review with the finance committee in October, where their sole objective is to “red line” as many projects as possible:
Finance committee: “Come in and sit down. Right, let’s have a look at this IT Budget. £70m? That’s ridiculous!”
Me: “Oh, that’s disappointing.”
Finance committee: “Right, let’s have a look at this first project from Phil. Nope, we are not doing that one.”
Me: “Oh no! (Bearing in mind that this is a made-up project from Phil.) Ok, I think as long as we do this other project (also made up) from Phil, I can persuade Phil to accept this deletion.”
Finance committee: “Good. Right, let’s look at this project from Jim. Well, we are not doing that either.”
Me: “Oh no! (Bearing in mind that this is also a made-up project from Jim.) Ok, I think I have a good enough relationship with Jim to convince him that we don’t need to do it.”
And so the process would go on until they had reduced my budget from £70m to £50m.
Finance committee: “There you go, £50m – think yourself very lucky.”
Me: “Thank you so very much, I am very grateful.”
I then walked outside the committee room laughing inside because I knew that I could only deliver £30m worth of projects, but I have a £20m buffer. Happy days!
So, I start the new year with projects that are rollovers from the previous year. However, by March, I normally get a call from Phil wanting a chat:
Me: “You ok Phil?”
Phil: “Yep. You know those projects we put in the budget last year?”
Me: “Yes.”
Phil: “Well I don’t want to do them.”
Me: “I know – because they were made up!”
Phil: “Instead, I would like to do this.”
Me: “That’s a great idea.”
I then go to my development team and ask them to estimate it:
Developers: “Is this a real project?”
Me: “Of course!”
Developers “Ok, give us a day to get back to you.”
Armed with that estimate, I found a similar-sized project (but made up) in the budget to swap it with. But I couldn’t swap it out without getting approval from finance:
Me: “Can I swap out this new project that Phil wants with a similar-sized project that is in the budget?”
Finance: “No, you can’t. This new project is not in the budget. Why did you put that other project in the budget if you don’t need it?”
I couldn’t say because the project was made up, so…
Me: “Well, that was back in September and the world has moved on. Phil would rather do this project than that one, blah, blah blah…”
Finance: “Well, I am not happy but on this occasion, we will swap it out.”
Me: “I am very grateful.”
However, this was a conversation that I had over and over again with Finance because all the projects were made up. I did this for 3 or 4 years and it wasn’t very edifying.
Fortunately, our CFO left and a new CFO arrived; I remembered that one of the values of Scrum is courage. So, I knocked on the new CFO’s door.
Me: “Hello, can I have a very open and honest conversation with you?”
CFO: “What about?”
Me: “Er, Finance!”
CFO: “Ok.”
So, I told her how I arrived at my annual budget. Now, she could have said, “you have been corporate lying for 3 years, there is my door, never darken it again!” Fortunately, she said, “that’s not a great process; tell me how I can improve it.”
Fortunately, I had an idea:
Me: “Let’s stop the game of I ask for £70m, you cut me down to £50m but I only need £30m. Let’s agree from the outset that I have £40m for the year.”
CFO: “I like that a lot because it means that I can remove £10m as a provision for capital projects.”
Me: “Talking to all the Directors in September is not helpful; they are too busy and they can’t forecast beyond 3 months. Instead, let’s get all the Directors together in December and, collectively, they tell me what they want to achieve in quarter one. In return, you release one-quarter of my annual budget to fund £10m.”
CFO: “You don’t want the whole £40m?”
Me: “Nope; just enough to fund the first quarter.”
CFO: “What happens at the end of the quarter?”
Me: “We demonstrate all the work that we have created. Plus, if we can, we will even try to put our work live so that we can get some feedback and generate value.”
CFO: “I like the sound of early value because that, in turn, can help me fund the remaining capital projects for the year. What happens next?”
Me: “We repeat the process and agree on the work with the Directors that we need to do for the next quarter.”
CFO: “We should try this!”
Why did I know that I could only deliver £30m worth of projects every year? Because, effectively, I am funding the people that do the work.
Previously, the budgeting process was slow and complex and caused a lot of wasted time and effort. In addition, I was constantly moving people to the work and moving people from one project to another, even if the project wasn’t finished because I needed to start another project.
With this new process we stopped the moving the people to the work, and moved the work to the people.
We created long-lived teams aligned around a solution (the Value Stream) and funded the Value Stream (the capacity) and just prioritized the work for every PI for that Value Stream.
Lastly, because we funded our development Value Stream, people were committed to the ART for an extended period. This also increased empowerment as many of the day-to-day budget decisions could become decentralized and shifted as needed. This increased the trust and transparency across the organization.
There was one additional benefit. Our budgets were not affected by Feature overruns and changing priorities. I never had to go back to finance and ask for more money, which is always a painful conversation. Let’s take a look at why.
In Figure 13.2, we have planned two Features; however, Feature 1 takes longer than planned. Because we have a built-in capacity margin within our PI and we can agree that finishing Feature 1 would provide more value than starting Feature 2, we can absorb this overrun within our capacity margin within the fixed cost of the PI:
Figure 13.2 – Feature overrun (© Scaled Agile, Inc.)
When we fund a Value Stream, the local content authority can decide whether to keep investing in a Feature that requires more investment or shift direction.
We have many options when we overrun, and they’re all based on the economic decision-making framework.
This is all good, but if we have several Value Streams within our portfolio, how can we decide how much funding to allocate to each Value Stream? Participatory Budgeting (PB) is an advanced technique that can help with this; we will take a look at it in the next section.
Participatory Budgeting (PB)
First, I will provide a quick history lesson that might help when you are explaining the concept of PB.
The concept of PB has its roots in the participation and empowerment movements of the 1960s and 1970s, which sought to increase the involvement of ordinary people in decision-making processes. The first known PB process was implemented in the Brazilian city of Porto Alegre in 1989, and it has since spread to cities and regions around the world.
Where PB has been used in a government, it is a democratic process in which community members directly decide how to allocate a portion of a government budget. It is a way for people to have a say in the decisions that affect their lives and communities, and it can also help to build trust between the government and the public.
In PB, community members are typically organized into committees or working groups that are responsible for identifying, prioritizing, and proposing projects for funding. These proposals can range from infrastructure improvements and public services to cultural and recreational programs. The proposals are then put to a vote, and the proposals with the most support are funded.
PB has been successful in engaging diverse groups of people, particularly those who may not normally participate in traditional democratic processes. It has also been shown to increase transparency, accountability, and the effectiveness of government spending. However, it can be challenging to implement, as it requires significant resources and buy-in from both government and community Stakeholders.
It was from these roots that the SAFe® framework took PB as the process that Lean Portfolio Management (LPM) recommends to allocate the total portfolio budget to its Value Streams.
The enterprise provides a portion of its total budget to each portfolio. In turn, each portfolio, through LPM, allocates the portfolio budget to individual Value Streams. These Value Streams then fund the people and resources needed to achieve the current Portfolio Vision and Roadmap.
Empowered Agile Release Trains (ARTs) advance solutions and implement Epics approved by LPM. LPM establishes Lean Budget Guardrails to provide the right mix of investments to address both near-term opportunities and long-term strategy. These guardrails also ensure that large investments are approved at the appropriate investment level in technology, infrastructure, and maintenance. These guardrails, coupled with KPIs, promote decentralized decision-making and execution while providing the necessary oversight.
In this chapter, we will not discuss PB in detail; please refer to the article from SAFe® in the Further reading section[2] to learn more. However, I do want to give you some top tips for running a session.
Pro tips
Here are some tips:
- Involve a diverse group of Stakeholders: It is important to ensure that the process is inclusive and representative of the portfolio. This may involve providing support to help them participate.
- Communicate clearly: Clear communication is key to ensuring that the process is understood and that all Stakeholders feel included. This may involve providing information in multiple languages and using multiple channels of communication.
- Establish clear guidelines: Establishing clear guidelines and rules for the PB process can help ensure fairness and transparency. This may include setting eligibility criteria for Epics and explaining the process for reviewing and selecting Epics.
- Provide support: Providing support to those participating in the process can help ensure that it is successful. This may include training and technical assistance and additional facilitation on the day of the event.
- Ensure accountability: It is important to establish mechanisms for monitoring and evaluating the process to ensure that it is transparent and accountable. This may involve establishing a system for tracking the progress of funded Epics and providing regular updates to the portfolio (see the Lean Portfolio Management events and Governance section in Chapter 14).
- Foster collaboration: Collaboration between all Stakeholders can help ensure that the PB process is successful.
Moreover, preparation is vital. If you haven’t done this before, try and find an experienced Coach (or SPCT) that has done the event before to help guide you.
Summary
Traditional portfolio management presents several challenges, including funding projects and Project-Cost Accounting and big up-front, top-down annual planning and budgeting.
In this chapter, we explored how we fund Value Streams instead of projects and move the work to people rather than people to the work. In addition, we showed how you can consider allocating investments across a series of Horizons to our solutions within our portfolio.
Finally, if you have more than one Value Stream in your portfolio, we shared how you can use the advanced technique of PB to allocate portfolio funds across your Value Streams.
In the next chapter, we will look at how to establish a Portfolio Flow.
Further reading
To learn more about the topics that were covered in this chapter, take a look at the following resources:
- Moore, Geoffrey (2015). Zone to Win: Organizing to Compete in an Age of Disruption. Diversion Books.
- Participatory Budgeting: https://www.scaledagileframework.com/participatory-budgeting/