Lean-Agile Portfolio Management for a Modern Strategic Planning

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Lean Budgets

Content Page. Lean Budgets is a Lean-Agile approach to financial governance which increases throughput and productivity by reducing the overhead and costs associated with project cost accounting.

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Agile software development and traditional cost accounting don’t match.

—Rami Sirkia and Maarit Laanti [1]

Lean Budgets

When implementing Agile at scale, many organizations quickly realize that the drive for business agility through Lean-Agile development conflicts with traditional budgeting and project cost accounting methods. As a result, moving to Lean-Agile development—and realizing the potential business benefits—is compromised, or worse, blocked entirely. To address this problem, SAFe introduces Lean Budgets as a Lean-Agile approach to financial governance.

Details

Every SAFe portfolio operates within an approved budget, which is a fundamental principle of financial governance for the development and deployment of business

Solutions⁠

. Figure 1 illustrates the Enterprise strategic planning process that creates each portfolio’s budget.

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Figure 1. Portfolio budgeting overview

The SAFe approach to budgeting is significantly different than traditional methods. SAFe lean budgets provide effective financial control over all investments, with far less overhead and friction, and supports a much higher throughput of development work. Figure 2 illustrates the transition and highlights the three main steps in implementing Lean budgets.

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Figure 2. Moving from traditional to Lean Budgets

The Problem of Traditional Project Cost Accounting

Before we discuss how to implement Lean budgets, it’s critical to understand the problems caused by traditional project cost accounting.

Project Budgeting Creates Multiple Challenges

Figure 3 represents the budgeting process for most enterprises before they move to Lean budgets. In this example, the enterprise has four different cost centers. Each cost center must contribute budget or people (the primary cost element) to a project.

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Figure 3. Traditional project-based cost budgeting and accounting model

This traditional budgeting model creates several problems:

Slow, complicated budgeting process – Many large technology projects are subject to siloed organizational structures, and therefore require multiple cost centers and functional managers to fund a single project.

Lower fidelity decisions – Individuals and teams make poorer choices when they are forced to make fine-grained decisions too early in the ‘cone of uncertainty,’ when the least amount of learning has occurred. There is no time or budget to identify and validate assumptions and create experiments that provide the data needed to determine how the project should be implemented.

Temporary teams lower overall performance – People are assigned to a project on a temporary basis and then return to their functional silo for future assignments to a new initiative. This hinders learning, employee engagement, and overall organizational performance.

Waiting on specialists causes delays to value delivery – Traditional project teams focus on individual skills, and it’s common for one project to block another while waiting for key personnel with specialized skills. If a project takes longer than planned—which it often does—many people will have moved on to other projects, causing further delays and lower quality.

Full resource utilization is favored over a fast flow of value – In the pursuit of theoretical efficiency, everyone is assigned to 100% capacity, often to multiple projects. However, Reinertsen notes that “operating a product development process near full utilization is an economic disaster” [2]. This disaster is a result of long queues, project delays, and high variability between forecasted and actual, time, and costs. A study by Adler concludes that “if managers had reduced their planned utilization rate to 80%, they could have reduced development times by 30% or more.” [3].

The Project Funding Model Impedes Adaptability

Once the project is underway, the challenges continue as the business needs change and the resulting project change. However, because the budget and people are fixed for the project’s duration, the result is an organization that is unable to change the plan without the overhead of re-budgeting and re-allocating personnel (Figure 4).

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Figure 4. Project funding inhibits the ability to adapt to change

Project Delays Happen. Things Get Even Worse.

Often, work will take longer than planned because of new learning, insights, and opportunities. Further, even when things go well, stakeholders may want more of a specific feature. Many organizations manage change through a Change Control Board (CCB), adding even more delays and decision-making overhead. The project model also hinders cultural change, transparency and solution development progress (Figure 5).

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Figure 5. When overruns happen, project accounting and re-budgeting increase cost of delay

When a schedule overruns for any reason, it’s necessary to analyze the variances, re-plan, and adjust the budget after getting approval(s) to continue. People are scrambled to different projects, resulting in adverse impacts on other projects. Now, the ‘blame game’ starts, pitting project managers against each other, and financial management against the teams. The ultimate result is information hiding, loss of productivity, and lower employee morale.

Projects Can Stifle Innovation

Solution development also requires innovation, and we cannot innovate without takings risks [2]. Because innovation contains a higher degree of uncertainty, it’s at best challenging to estimate these types of projects. At worst, organizations tend to minimize investments in innovation, eroding the value of the solutions they create. In addition, it can be culturally challenging to support a project that doesn’t realize its stated objectives (a “failed project”), whereas thinking about the ongoing investment in innovative solutions promotes a growth mindset where fast-failure is considered integral to learning.

Beyond Project Cost Accounting with SAFe

SAFe provides a lean budget approach, which reduces the overhead and costs associated with traditional cost accounting, and which empowers people through Principle #9, Decentralized decision-making. With this new way of working, portfolio personnel no longer plan the work for others, nor do they track the cost of the work by discrete projects. There are three main steps to lean budgets, as described below.

1. Funding Value Streams, Not Projects

The SAFe portfolio budget funds a set of Development Value Streams, each of which delivers one or more business solutions. So, the first step of Lean budgeting is to give each value stream a budget as Figure 6 illustrates. Ideally, this is done via

Participatory Budgeting⁠

, which engages a broader group of stakeholders in the process. A set of Lean Budget Guardrails support these budgets by defining the spending policies, guidelines, and practices for a specific portfolio. Guardrails, like any good governance, enable increasing autonomy to the value streams.

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Figure 6. Each value stream has an operating budget for people and other resources

Funding value streams vs. projects delivers several benefits:

Empowers local content authority, which moves decisions to where the information lives, enabling faster and better decision-making

Improved clarity of spending through value stream budgets

Better visibility to large business and technical initiatives (portfolio business and enabler epics) through the portfolio Kanban

Knowledge workers working in long-lived value streams are simply more productive than temporary project teams

Self-organization allows moving people to the most critical work without escalation to management

Better management of the budget while simultaneously providing more autonomy to Agile Release Trains (ARTs) and Solution Trains

Figure 7 shows that in most cases, the expenses across a Program Increment (PI) are fixed or easy to forecast. Moreover, features that take longer than expected do not change the budget. As a result, all stakeholders know the anticipated spend for the upcoming period, regardless of what features are implemented.

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Figure 7. The budget for a program increment is fixed 2.

2. Guiding Investments by Horizon

Just as a personal finance portfolio balances investments in different asset classes (e.g., stocks, bonds, real estate), SAFe balances different horizons of investment. Get this balance wrong, and you can starve the future by over-investing in today, or you can miss near-term opportunities while pouring too much money into the future.

Adapted, in part, from the McKinsey horizon model [4], the SAFe solution investments by horizon model in Figure 8 highlights spending allocations for solutions that are created by the value streams. This helps enable value stream owners and fiduciaries make more informed investment decisions and helps align the portfolio with

strategic themes⁠

while promoting overall health and growth.

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Figure 8. SAFe investment horizon model illustrating solution investments by horizon

An overview of each horizon is presented below.

Horizon 3 (Evaluating): Horizon 3 investments are dedicated to investigating new potential opportunities for profitable growth in the future, typically within 3-5 years. These could be innovative new types of solutions and other investments that could even represent changes to the fundamental business model. Generally, these are exploratory and research activities that require modest funding, and can often be somewhat isolated from the current operating model. Accordingly, an epic is usually created to start the initiative. If the epic hypothesis is proven true, and the emerging solution provides a sufficiently compelling return on investment, it will typically continue to horizon two.

Horizon 2 (Emerging): Horizon 2 reflects the investments in promising new solutions that have emerged from horizon three. These investments are anticipated to provide a profitable return within the next 1-2 years. Since these new solutions are promising, the business is willing to make ongoing investments in excess of the current return. Some may require horizon one resources and care must be taken to make sure they are not starved of the operating resources needed to reach horizon one. If the decision is made to stop, it’s likely that some modest investment is still necessary to decommission the solution, as the horizon two solutions have usually made their way into the internal and external business ecosystem.

Horizon 1: Horizon one reflects the desired state where solutions currently deliver more value than the cost of the current investment. These solutions require ongoing investment to maintain and extend functionality. For convenience in reasoning about these investments, horizon one is further subdivided into two profiles:

Investing: These investments reflect solutions that require significant ongoing investment. This may be due to market or solution immaturity, changes to the market or technology, or the desire to fuel growth, such as capturing market share in a fast-growing product.

Extracting: These investments typically represent stable solutions that are delivering great value with a relatively lower need for additional spending. Investment in these solutions is managed to assure continued value, profit, and cash flow, enabling funding of emerging solutions.

Horizon 0 (Retiring): All solutions eventually meet end-of-life. Horizon 0 reflects the investment needed to decommission a deployed solution, which frees the budget for more promising investments in other horizons.

Value stream leaders must learn to manage all four horizons simultaneously. After all, value streams must dynamically evolve solutions, introduce and retire solutions, manage technological change, and respond to market demands. In addition, on occasion, entire new value streams must be created, and others may be retired. These choices are informed by portfolio budget guardrails, which help determine how much budget should be invested in each investment horizon.

3. Applying Participatory Budgeting

SAFe

Participatory Budgeting⁠

(see Figure 9) is an LPM event in which a group of stakeholders decides how to invest the Portfolio budget across solutions and epics. Participatory budgeting ensures that value streams receive the funding required to advance the solutions and promotes the collaborations that help right-size the investments and align strategy and execution.

Participatory budgeting provides numerous benefits:

Provides leaders with insights and perspectives from multiple stakeholders

Creates alignment on difficult funding choices

Improves engagement and morale

Reduces implementation time and overhead

During a participatory budgeting event, stakeholders are organized into groups of four to eight people. To promote understanding, each group should have a mix of roles from the different value streams. Each participant is given the list of solutions and epics, the amount of investment funding requested by the value streams, and an equal portion of the total portfolio budget. For example, consider a portfolio with total requested investment funding of $46M and a budget of $40M. A forum of five participants would allocate $8M to each participant.

Participants collaboratively invest their individual budgets against the requests under the guidance that solutions and epics should generally be fully funded to be considered for actual funding when the forum is complete. Since the participants can’t fund all of the items, they must work together to identify the best investments. Even more importantly, participants from different value streams must collaboratively pool their budgets to support initiatives that no single value stream can fund by itself. Because partially funded solutions and epics are candidates for termination the group will negotiate to determine where to make the best investments. The discussions from this collaboration allow participants to make choices that optimize value delivery across the portfolio.

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Figure 9. Participatory Budgeting Overview

During participatory budgeting forums, teams discuss the degree to which their choices adhere to investment horizon guardrails and adjust their investments accordingly. Forums also enable teams to make recommendations that can increase or decrease the investment in a solution or epic that reflects the wisdom and experience of the team.

The results of multiple forums are analyzed and LPM finalizes any adjustments needed to the value stream budgets in alignment with agreed-upon funding.

Learn More

[1] Special thanks to Rami Sirkia and Maarit Laanti for an original white paper on this topic, which you can find here.

[2] Reinertsen, Don. Principles of Product Development Flow: Second Generation Lean Product Development. Celeritas Publishing, 2009.

[3] Getting the Most Out of Your Product Development Process. https://hbr.org/1996/03/getting-the-most-out-of-your-product-development-process

[4] Baghai, Mehrdad, and Steve Coley. The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise. Basic Books, 2000.

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Lean Budget Guardrails Content Page. Lean Budget Guardrails describe the policies and practices for budgeting, spending, and governance for a specific portfolio.⁠

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Scaled Agile Framework - SAFe 5 Header Page. Here you may find a list of contents with all the Knowledge associated to the Portfolio Level of the Scaled Agile Framework (SAFe 5)⁠

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Portfolio Kanban Content Page. The Portfolio Kanban system is a method to visualize and manage the flow of portfolio Epics, from ideation through analysis, implementation, and completion.⁠

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Lean Budgets

Details

The Problem of Traditional Project Cost Accounting

Project Budgeting Creates Multiple Challenges