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

—Rami Sirkia and Maarit Laanti [1]

Lean Budgets

Definition: Lean Budgets is a financial governance approach that funds value streams instead of projects, accelerating value delivery and reducing the overhead and costs associated with traditional project cost accounting.

When implementing Scaled Agile, 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 its approach to financial governance.

Details

Each SAFe portfolio operates within an approved budget, a fundamental principle of financial governance for developing and deploying Business Solutions. Figure 1 illustrates a typical Enterprise strategic planning process that creates each portfolio’s budget in SAFe.

Figure 1. Portfolio budgeting overview

SAFe’s Lean approach to budgeting is significantly different than traditional methods. It gives 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 primary steps for adopting Lean budgets.

Figure 2. Moving from traditional to Lean budgets

The Problem of Traditional Project Cost Accounting

Understanding the problems caused by conventional project cost accounting is critical before describing the adoption of Lean budgets.

Project Budgeting Creates Multiple Challenges

Figure 3 represents the traditional budgeting process for most enterprises. In this example, the enterprise has four different cost centers. Each cost center must contribute some of its budget or people (the primary cost element) to a project.

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

This standard budgeting model creates several problems:

Slow, complicated budgeting process – Many large technology projects are subject to siloed organizational structures and require multiple cost centers and functional managers to fund a single project.
Less accuracy in decision-making – Individuals and teams make poorer choices when forced to make specific 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 if and how the portfolio should implement a solution.
Temporary teams lower overall performance – People are generally assigned to a project temporarily and then return to their functional silo for future assignments to a new initiative. This structure 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 the availability of specialists. If a task 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 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 results from 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 average 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 to change and the resulting project change. However, because the budget and people are fixed for the project’s duration, an organization cannot change the plan without the overhead of re-budgeting and reallocating personnel (Figure 4).

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, adding even more delays and decision-making overhead. The project model also hinders cultural change, transparency, and solution development progress (Figure 5).

Figure 5. When overruns happen, project accounting and re-budgeting increase the 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, adversely impacting other projects. Now, the blame game starts, causing project managers to fight 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 taking risks [2]. Because innovation contains a higher degree of uncertainty, estimating these projects is, at best, challenging. 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 stop a project that doesn’t realize its stated objectives (a “failed project”). In contrast, the ongoing investment in innovative solutions promotes a growth mindset where the fast failure of experiments 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 empowers people through Principle #9, Decentralized decision-making. With this new way of working, the portfolio no longer plans 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 portfolio budget funds a set of Development Value Streams. Each delivers one or more business solutions and is given a budget for its value stream (Figure 6). Ideally, Participatory Budgeting is adopted, engaging a broader stakeholder group. Lean Budget Guardrails define a portfolio’s spending policies, guidelines, and practices. Like any good governance, guardrails enable increasing autonomy of teams.

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 –moves decisions to where the information lives, enabling faster and better decision-making
Improves transparency – offers clarity of spending through value stream budgets
Better visibility – makes the flow of portfolio business epics and enablers visible from idea through implementation using the portfolio Kanban.
Improves productivity of knowledge workers – working in long-lived, stable value streams and ARTs are more productive than temporary project teams
Self-organization – allows moving people to the most critical work without escalation to management.
Better management of budgets – gives more autonomy to Agile Release Trains (ARTs) and Solution Trains while providing the proper oversight and flexibility.

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

Figure 7. The budget for a PI is fixed

2. Guiding Investments by Horizon

As a personal financial portfolio balances investments in different asset classes (stocks, bonds, real estate), SAFe balances solutions in different investment horizons. Get this balance wrong, and you can starve the future by over-investing in today or miss near-term opportunities while allocating too much money into an uncertain future.

Adapted partly from the McKinsey model [4], the SAFe solution investment horizon model highlights spending allocations for value stream solutions (Figure 8). This model helps value stream owners and others accountable for financials to make more informed investment decisions and helps align the portfolio with strategic themes while promoting overall health and growth.

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

The following paragraphs provide an overview of each horizon.

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 solutions and other investments that could even represent changes to the fundamental business model. Generally, these exploratory and research activities 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 from horizon three. These investments are anticipated to provide a profitable return within 1-2 years. Since these new solutions are promising, the business is willing to make ongoing investments above the current return. Some may require horizon one resources, and the portfolio must ensure they have sufficient operating resources to reach horizon one. Suppose the decision is made to stop, likely. In that case, 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 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 divided into two profiles:

- Investing: These investments reflect solutions that require significant ongoing investment 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 delivering great value with a lower need for additional spending. Investment in these solutions ensures enduring value, profit, and cash flow, enabling the 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, the portfolio occasionally must create an entirely new value stream, and others may be retired. The portfolio budget guardrails constrain these investment choices.

3. Applying Participatory Budgeting

SAFe Participatory Budgeting (PB) is an LPM event in which stakeholders decide how to invest the portfolio’s budget across solutions and epics, as illustrated in Figure 9. PB 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.

PB 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

Stakeholders are organized into groups of five to eight people during a PB event. Each group should have a mix of roles from different value streams to promote understanding. Each participant gets 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 an allocation of 40M. A forum of five participants would allocate 8M to each participant.

Participants collaboratively invest their 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 support all 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. 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.

Figure 9. Participatory Budgeting Overview — Figure 9. Participatory budgeting overview

During or after PB forums (sessions), teams discuss how their choices adhere to investment horizon guardrails and adjust their investments accordingly. These sessions 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 entire group. 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, Donald G. The Principles of Product Development Flow: Second Generation Lean Product Development. Celeritas Publishing, 2009.

[3] Adler, Paul, Avi Mendelbaum, Viên Nguyen, and Elizabeth Schwerer. Getting the Most Out of Your Product Development Process. Harvard Business Review, March-April 1996. Retrieved October 13, 2023, from https://hbr.org/1996/03/getting-the-most-out-of-your-product-development-process

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

Last update: 13 October 2023