What!?! Stop Budgeting? How will we live?!
Most organizations invest a tremendous amount of energy in their budgeting process. It's not uncommon to see the budget planning take 9 months of the year, not even including time spent managing to that plan. Firms working on shorter budget cycles, such as quarterly, invest a lot time budgeting. Are organizations getting a return on the investment they are making in budgeting? Is there a better way to spend time and money, and achieve a better outcome?
What is a budget for anyway? It’s a way of tracking your investment against the return. And I think you absolutely should do that. One problem comes when budgets mix in funds for salaries. Then when budgets are cut, it affects salaries and jobs. It’s a game of musical chairs where everyone scrambles to find a chair when the music stops. It creates unnecessary anxiety and sends productivity plummeting.
A popular belief in the Agile community is that shorter budgeting cycles are better. “We’ll be like a venture capitalist, and only give more money when projects are successful!” While I agree that the yearly budget cycle is cumbersome, shortening the cycle solves the wrong problem. Think about what would happen if you shorten the budget cycle. Teams have to beg for their survival even more often than they did before. And what constitutes approval for more budget? If the team is successful, well why do they need more budget, aren’t they done? If the team misses their target, would we give them less budget and ensure their failure? Where does “celebrate failure” fit in all this? Shrinking control on budget allocation is not the answer, the answer is the exact opposite. The problem is not on the front-end in the allocation of budget, the problem is on the back-end, in evaluating the results.
Here are some ideas to stop budgets from ruling your life.
Invest in Outcomes not Work. Think of your budget like this “I’m investing $X in expanding the millennial customer base.” Instead of specifying features for dollars, you invest in efforts.
Decouple the Budget from People. Employees already work at your organization. Their jobs are not tied to the budget, so you don’t need to budget for them. This has two advantages; first, people don’t feel like their job is at the mercy of the budget and second, your investment allocation becomes very nimble.
How do you know if your people are working on the right things? Look at your outcomes. Are they improving?
Prioritize Relentlessly. If I’m not budgeting how do people know what to work on? Because you prioritize. The organization works on the most important priority on the list.
Forecast using Historical Data. With no budgets and only prioritization, how do I forecast?! You have historical data on what your organization can deliver. Use that. Features are a really great way to do this.
Everyone gets a P&L. Yes, even with no budget you can have a P&L at all levels. Why did teams stop doing this? Every organization and team can know their cost, including people cost, and they can know their profit (or savings). A budget speculates on the ROI and tracks against the plan, the P&L tracks actuals. Having teams own their own P&L results in teams that are focused on their outcomes. They will be incentivized to get to value as quickly as possible. When a team sees that they are past ‘break-even’ they don’t need a performance review. They know how they are doing.
Define Clear Learning Goals. Initiatives should be canceled when the targeted outcome has been proven infeasible. Each investment needs learning goals in addition to the outcome goals. If the team is not reaching the goal but has learned so much that a continued investment is warranted, keep the investment! This is how innovative products find their way to market. Consider this example, “We failed to create a website for dog-lovers, but we learned that horse-lovers really like our site. And the horse-lover market is 3x the spending potential of the dog-lover market. Can we invest in pivoting to target horse-lovers?”
How have you survived the budgeting process? Let us know!