Saturday, January 26, 2013

Agile Budget Planning

There is a lot of similarity in the way a company plans a traditional annual budget and the way an IT group plans a traditional waterfall system development project. They are both static and reactive mindset and methodology used frequently at industrial age, and they are both giving way to more agile and responsive ways of operating in the 21st century of digital economy.

1. The Dynamic economy calls for agile budgeting and real-time planning 

Are there really businesses out there that create financial budget forecasts and blindly stick to them regardless of the realities of the world happening around them? If there are, that seems to be a certain recipe for disaster. Annual budgets cause many of the same dysfunctional behaviors as long as waterfall development plans. They motivate people to hide bad news on delays and cost overruns then they try to hustle and catch up with forecasts and plans in order to avoid being penalized. 

Any good leader/manager will routinely monitor his/her budget and create either formal or informal forecasts as the environment continually shifts. Changes to that forecast have to be communicated early and often so that you purposefully don't wind up with those big surprises at the end of the fiscal year.

The agile budgeting focus is on optimizing use of resources based on rolling forecasts and not adhering blindly to fixed annual plans and budgets. Similar to the way Agile IT uses an iterative approach to developing systems, some innovative organizations use iterative budgets based on continuous feedback from real world events and actual operating results. These agile pioneers advocate doing quarterly or even monthly forecasts instead of one big annual forecast and dynamic resource allocation based on emerging threats and opportunities. Instead of blindly carrying out projects because they are in the annual budget, agile finance people continually identify opportunities with the highest return and allocate resources appropriately to profit from those opportunities. Sounds like agile IT doesn’t it?

2. KPIs Tied to Incentive Objectives

Will agile budget planning lead such professional dilemma:  “I would miss getting bonus payouts because I did what was right for the company instead of doing what my bonus targets were incentivizing me to do. I always found it a slap in the face to be penalized like that when I put changing company needs ahead of my unchanging bonus targets.”

Thus, there has to be a balance. The wise finance people should find a way to balance the need to get good bonus targets with getting a flexible budgeting process that can keep up with a fast changing world. The incentives should simply encourage the behavior to increase company profits – in that way people don't get stuck with predefined targets for how to do their job and they can keep changing what they do as long as it delivers the profitability levels that business is all about.

3. Agile Budget Planning, Utopia or Reality?

Weather organizations fit for Agile could be situation-driven, Agile methods work very well in some industries but not in others, there isn’t one size fits all. Linear industries call for waterfall methods, and there are predictable businesses that can reliably forecast activity for the coming year and can adhere to annual budgets

It is also true that sometimes agile is used as an excuse not to do good project management or system documentation or requirements gathering. This is unfortunate and experienced agile practitioners know that agile requires more discipline not less because things are happening faster. Agile is like the expert slope at the ski resort, not for beginners

But overall speaking, Agile methodology either for project development or budget planning, is more adaptable to changes, enforcing iterative communication, and improving flexibility, the most innovative businesses are embracing it.


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