Lean-Agile Budgeting supports growth mindset in established enterprises

Oct 4, 2017, 3:00 PM

In traditional organizations the cost center budgets are the ceiling for the spending, but also the floor. The existing budget must be used, because otherwise the cost center budget will be cut for the next year. So, how does SAFe solve this budgeting dilemma?

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What makes established organizations so slow in changing direction? Often agile moves are hindered by stiff budgeting practices.

Watch Eric Ries' video on the Finance of Innovation. Ries is requesting a Finance system that would be supporting growth. With SAFe Lean-Agile Budgeting we have a method for just that.

Most organizations operate with “cost accounting” mindset. They seek to “do more with less (investments)”. This mindset leads to focusing on short-term revenues over long-term investments.

This rarely leads to great results in the long-term. Rather, the cost-cutting mindset will likely increase the costs in the long-run, as John Seddon has put it:

If you concentrate on cutting costs – costs tend to rise. Only if you concentrate on effectiveness do the costs go down overall.”

Only when the organization learns how to generate more value and streamline the system, the overall costs will go down. Until then, different “cost-cutting” exercises merely generate more sub-system optimization, and the costs will go up.

In traditional organizations the cost center budgets are the ceiling for the spending, but also the floor. The existing budget must be used, because otherwise the cost center budget will be cut for the next year. The budgeting structure makes the organization very inflexible and makes it hard to create new innovations. This is because startup-like activities almost certainly lose to the existing products in budgeting negotiations.

How does SAFe solve this budgeting dilemma?

In SAFe, a new research initiative would be formed as an Epic with an Epic Hypothesis Statement, a list of potential benefits. See Figure 1. If it creates a brand new Value Stream, it is potentially driven as a separate team.


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Figure 1. New start-up with some budget and prioritized Epic.


Automation leads to innovations

If the start-up doesn’t show proper business potential, it can be pivoted and run with the same allocated money – or the money can be allocated to the next best business idea.

Once the idea with the strongest business potential and growth figures has been found, more money can be allocated to the start-up. In practice this means, that some teams that have worked with the established business will move to the new value stream

This goes well with the Lean idea that the established businesses should always increase the level of automation in order to deliver the same with less people / money – or expand the functionality / business by making further innovations.

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Figure 2. Re-allocated budget when start-up is growing.


Growth mindset is key in Lean-Agile budgeting

SAFe Lean-Agile budgeting is always seeking for the optima – the enterprise can make gradual small corrections on the course, just like an airplane is 90% off course but will reach the destination by making small adjustments.

This enables options thinking. Budgets can be managed just like an investment portfolio: allocation today is based on the performance and visions of the companies today. The performance and new figures will dictate how the investment portfolio gets balanced tomorrow. This way SAFe supports the optimal distribution of investment money, and thus the growth mindset.


Sources

Lean Budgets http://www.scaledagileframework.com/lean-budgets/

Learn more on Growth mindset: https://hbr.org/2014/11/how-companies-can-profit-from-a-growth-mindset

John Seddon: Systems Thinking in the Public Sector: The Failure of the Reform Regime... and a Manifesto for a Better Way, Triarchy Press Ltd; First edition (November 4, 2008)


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THE AUTHOR

Maarit Laanti is the Head Coach of Nitor. She has done her dissertation on large scale agile transformation. Maarit is one of the contributors of SAFe methodology and is the first certified SAFe program consultant trainer in Finland.