There is a well-known problem when Agile projects meet a client’s yearly IT budgets. The problem with the yearly budget is that
1. It is largely incorrect as it has been planned with minimal information
Most big organizations have a budget review only once a year where a CIO and his team have to decide what their future looks like for the year. This is the time when everyone looks into their magic crystal ball to estimate the amount of funding required for their projects in the financial year.
These numbers are largely incorrect purely due to the scale at which they are done and with the limited amount of information available upfront.
2. Fosters project thinking and deliver under budget than building the right product.
Once a ballpark yearly budget figure is reached after minimal planning by project teams, the teams are encouraged to plan in more detail to secure their exact funding required.
Project teams then start building their detailed product backlog of stories with estimates and break it down into releases through the major part of the year to come up with their funding numbers which are then secured.
This not only results in a lot of upfront planning even in Agile, but also focuses the team on delivering that huge backlog of stories under the project budget, than focusing on building the right product fit for the market. Needless to say that these big backlog of stories often get outdated within the first few iterations and so does the estimates and hence the budget plan.
So is there an alternative?
The good news is that a lot of companies are beginning to recognize this problem. And these are companies who view their products as “Strategic IT” investments and not an operational overhead. The solution requires changes in 2 key areas, budgeting and project planning and tracking.
Rolling wave or Quarterly budgeting
A year is clearly too long to forecast and budget for upfront. One option is to budget for the first couple of iterations and then budget the third and fourth just before the completion of the second iteration based on real data. This ensures that at any point in time you have budget for the next couple of iterations.
If a couple of iterations are too less for long-term visibility, the other option is to do it quarterly.
The advantages of this approach are
- More informed hence accurate budgeting based on actual data on the ground.
- Encourages people who own the high level budget to engage with the team on the ground at least once every quarter.
Track projects to measurable goals and not to a product backlog.
Not having to forecast a yearlong budget is a boon to an Agile team. The team can then focus on building just enough of the backlog for their product to be able to validate it with end users and then pivot or preserve as necessary.
This is a mindset shift to the traditional Agile/Scrum technique of doing discovery workshops and then building a backlog of user story phrases that are then elaborated every sprint.
Instead, the team needs to come up with clear and measurable goals on how they measure the success of the product. This could be things like increasing user uptake of the product by releasing some new features, improved customer service, launching a new brand / service etc.… As some of these goals might be long term, it is important to break them further down to a level that can be measured every month or a quarter. An example would be to validate an idea for a web page with 5 users before building 3 similar web pages in the subsequent iterations and validating with 50 users.
The owners of the budget in this case can decide based on the progress towards goals of the first few iterations to fund / invest in the next few iterations. This also gives them on option to pivot or preserve based on what they see built so far.
To summarise, the advantages of this approach are
- Less of time spend in estimation of effort and more time thinking how to build something valuable
- Keeps stakeholders who make budgetary decisions more engaged in the product.
- Makes product owner more responsible to think and show results building the right product than forcing the team do deliver a backlog
The Budgeting Black Hole - Johanna Rothman
Annual Budgeting and Agile IT - Ross Petit
Lean Startup – Eric Ries
Implementing Beyond Budgeting – Bjarte Bogsnes