Mark Schwartz, Enterprise Strategist at AWS and author of A Seat at the Table: IT Leadership in the Age of Agility1, describes the shift that organisations need to make when thinking about the relationship between IT and the enterprise:
"Agile, Lean, and DevOps approaches are radical game changers, providing a fundamentally different way to think about how IT fits into the enterprise, how IT leaders lead, and how IT can harness technology to accomplish the objectives of the enterprise. But honest and open conversations are not taking place between management and Agile delivery teams."
There’s a reason why funding models are often one of the last areas to tackle as part of an enterprise agility transformation – they’re complex and require true collaboration at the executive level – but if we want our organisations to achieve the full potential from our transformation initiatives, then we need to transform funding models.
Why do funding models need to change?
Within any enterprise, funding models will ultimately dictate how well you can respond to change and how your organisation can better innovate, adapt, and deliver value to customers.
The main driver for changing funding models is that the current way of funding “IT projects” isn’t working for most enterprise organisations.
Keanen Wold and authors describe the need for change in the white paper “Evolving the Funding Process”2:
"One of the biggest impediments to this shift is the traditional funding model. While the technology functions in many organisations have adopted various methods of implementing Lean and Agile thinking, many organisations remain stuck in a waterfall, up-front planning model when it comes to budget and fund allocation.
This manifests itself with a variety of practices contrary to Agile/Lean techniques: annual budget cycles, strict monitoring of team members' time down to the hour to support capitalisation allocation and research tax incentives, a burdensome, paper-heavy-one-size-fits-all funding approval process that creates a fictional view of ‘low risk’."
How do traditional funding models impede enterprise agility?
📆 Annual budget cycles: With the rise of digital, all businesses rely heavily on IT in order to respond rapidly to a constantly changing environment and deliver value to customers. Unfortunately, this much needed flexibility isn’t possible if allocating budget to IT projects only happens once a year.
🔮 Project-centric operating model, with delivery milestones and pre-determined outputs or deliverables: “Bullet proof” business cases and upfront requirements apply a deterministic approach to what is, in reality, an emergent domain – it is impossible to predict what customers will want and what solutions will effectively meet their needs.
⚠️ Funding projects rather than teams - the emphasis on getting work done over outcomes and maintainability: There’s no denying that certain types of work require effective coordination and a schedule to meet timelines (for example, regulatory go-live dates, product launch dates). However, when projects are the vehicle for funding, the people driving the work are incentivised to get work done, rather than to ensure the products and services are built in a sustainable way.
🕰️ Focusing on individual time tracking to distinguish between CapEx and OpEx work contributions: Putting the onus on individuals to constantly keep track of how they spend their time is helpful for accounting, but makes it harder for them to do the jobs they are there to do.
What does good look like?
Regardless of how your organisation funds work now, let’s get clear on what the ideal outcome looks like.
According to the 2023 Business Agility Report3, adopting adaptive funding models is the biggest indicator of business agility maturity. Organisations that use these models excel at shifting funds dynamically from areas of less value to areas of greater potential in the business.
In an ideal world, this is what “good” looks like for funding models:
🎯 Funding business outcomes based on value rather than project deliverables so you can adapt fast to change
Rather than specific outputs, invest in and fund outcomes that support the business and product strategy. This means that when new information emerges or market conditions change, teams have the authority and flexibility to shift attention to whatever will best contribute to the outcome, instead of spending time on the wrong things because the funding is only for pre-agreed project deliverables.
📊 Reallocating capacity for the greatest impact
Empower leaders to reallocate capacity to areas where it will have the greatest impact. As more information becomes available, organisations can move work to other teams to meet the emerging requirements.
💹 Supporting teams by funding outcomes
Assign funds to value streams with clear, measurable outcomes. This approach encourages teams to experiment to find the best solutions for customer needs, and brings decision-making to the level closest to the actual work being done.
🔁 Making funding cycles flexible
Decouple internal funding cycles from external reporting cycles, so that an organisation’s reporting process doesn’t dictate how funds are planned and spent internally.
✅ Enabling teams to focus more on the work than on admin tasks
Traditional funding models put heavy demands on individuals and teams to track time against what can be hundreds of different funding codes; this puts the emphasis more on time-keeping admin than on the work that delivers value.
📈 Using business metrics, outcomes and customer value to drive transparency
Rather than status updates, or reporting on schedule, milestones achieved, and percentage of work completed, an adaptive funding model will home in on whether outcomes are being realised, and customer value is increasing. Teams can provide transparency around these metrics with a team visual management system (for example, a board) and link their work directly from this system to investments and outcomes (OKRs).
How can you take the first step towards transforming your funding models?
Transforming funding models in enterprise organisations isn’t something that happens overnight. What we have learned, time and time again, is that organisations that attempt a transformation without including finance will never realise their full potential. Ultimately, they will hit a ceiling.
To bring about meaningful change, we always advocate starting small, with initial steps designed to strengthen understanding and alignment throughout your organisation, before identifying ways forward.
Here are five key questions that your Finance and Change Leaders should discuss and find agreement on to improve your organisation’s funding model:
The answers to these questions will be both confronting and enlightening, but ultimately will help your organisation adapt and support its teams to give them the best possible chance of success.
We'd love to hear about your experiences with funding models and the impact on outcomes.
