Changing Your Funding Model is a Requirement for Success in Agile

When you are considering moving your organization to Agile the single most important decision and change you will make has nothing to do with the frameworks that you will select for your teams to operate under.

The change that provides the foundational support for these frameworks is about how you fund the work that these teams will do. 

Agile frameworks are not designed to support fixed budget, date, and scoped projects, yet that is exactly what happens when most organizations ‘Go Agile’. Teams start working differently but Management and Finance stay aligned to annual funding cycles and weekly project plan read-outs.

To lay a foundation for success in Agile, you need to change your funding model, moving away from funding projects in annual planning cycles to one that funds dedicated teams where work will flow to teams continuously. 

Much of the resistance in making this change comes from the fear that Finance will never change and this is just the way that they have to manage the books. The reality is far from that, organizations can and do make the shift from funding projects to funding teams, and when they do the entire dynamic of how work is managed and delivered changes dramatically.

For Finance this shift simplifies financial management because instead of having to manage the P/L for hundreds to thousands of projects, you will have a single entry for each team, which on average costs (blended rates) around $1 million annually. So if your organization has 40 Product teams you can expect the cost of delivering software to be $40 million.

By changing the funding model from projects to teams you can then shift your focus to Value, building a value-based Portfolio approach that identifies a risk/return profile for your organization and products which will allow for the appropriate investments to be made.

The shift to funding teams requires a change in decision-making that ensures that we are balancing what is identified as the most valuable against the cost because not everything we do can or want to should be done.   Moving to funded teams does not remove the fiduciary responsibility everyone has to make sound investment decisions.  

This change to delivering features in a continuous fashion allows for capitalizing on a more frequent basis which has its own benefits from a financial reporting perspective.

Why Aligning Value and Strategy is Important

Value is often in the eye of the beholder and because we attach ourselves to the perception of that value we can’t often differentiate between what we want and what we need.

As leaders, we often follow a similar approach when deciding what projects we should take on for the w\organization.  For instance, we may read about something interesting that another company is doing and think that we should be doing the same thing, this becomes your want.

Unfortunately what that other company is doing may not be what your organization either needs right now or worse is not even strategically aligned to its strategies.

All too often organizations have an annual planning cycle where individual leaders pitch their ideas for new projects and request funding.  And all too often these projects are disjointed, competing with other projects seeking opposite outcomes, or are even duplicate efforts leveraging different technologies, all because their focus is more on wants over needs for their capability.

So how do we move from thinking in wants to acting on needs?  It starts with transparency and alignment to the organizations' strategies.

How many people in your organization know and understand the strategies that are key to delivering value to your customers?  How many more define their initiatives around those strategies?  Unfortunately, the answer is very few. 

To start you need to create a Portfolio Valuation scoring model that is tied to your strategies and then provides a scoring mechanism that is aligned to Objectives and Key Results.  The key results form the basis of the value factors that will generate a score for each initiative.

By aligning the scoring engine to strategies and having the value factors aligned to metric outcomes, we can apply the scoring model across the organization holistically.  This is key to moving from a wants to needs conversation in the organization.

Having implemented this model in several organizations what happens at the leader level is that they have a harder time justifying investments that they want if they have low scores associated with them.  How do you convince leadership that it’s a good idea to invest a million dollars in a project with a value score of .5?  The answer is it’s not easy.

At one organization that had been trying to make the case to invest in a new ERP system with no success, we were able to tell the story better when leadership saw that they were investing large sums of money into low-value returns.   So the scoring model isn’t just to stop you from working on the wrong things, it also informs future investments to support fact-based decisions.

Value needs to be the driving focus of any organization as you have a limited amount of investment capital for software development.  Adding useless features that don’t align to strategy and have low-value returns is a waste of money

Additionally building things you don’t need adds bloat to your tech stacks as this code still has to be maintained and supported long-term.  The cost of any feature is never just related to its development cost. 

Investment Portfolio Management Applied to Product Management

I've been telling myself that I needed to attempt to apply formal investment portfolio management techniques to how we value, prioritize and manage our portfolio of product development efforts, so here goes (definitely still a work in progress)

Back in 1950's Dr. Harry Markowitz created an investment model called the 'Efficient Portfolio'.  Markowitz stipulated with his theory that an "Efficient Portfolio is one where no added diversification can lower the portfolio's risk for a given return expectation (alternately, no additional expected return can be gained without increasing the risk of the portfolio)".

The Markowitz Efficient Frontier is the set of all portfolios that will give the highest expected return for each given level of risk.

 

This model set the framework for how current money managers build a portfolio of securities that provide range of investment returns to meet each investors risk profile.  Providing investors with a broad range of risk/return choices allows individual investors to build an investment portfolio that meets their specific risk threshold with respect to a given rate of return.

An efficient portfolio looks like this:

 

When you are younger and have time to take chances your risk/return profile might be higher on the frontier, whereas at retirement you will slide down that scale as you are more interested in protecting your total investment.  One thing to note is that if your risk/return data falls above the efficient frontier, then you are accepting a level of risk that is not in line with the rate of return you might receive.  Pushing past the efficient frontier can open you up to unexpectedly high returns but conversely you can also expect very high negative returns due to the risk you are taking on.

Product Development organizations can utilize the Frontier as well, for example, a young startup will have a much higher appetite for risk as they understand that to take market share from competitors they need to take risks with speed to market.  However there are specific elements of risk that need to be considered as you speed your product to market.  Ensuring that Usability has been considered, Prototypes have been developed, code quality is considered and test automation all need to play part when you are building your risk/return Efficient Frontier for your Product Portfolio.

If we were to apply the Efficient Frontier to how we manage our Software Development investments we could build a risk/return profile that is easy to understand and align with the organizations risk/return profile.   There are many software projects that at inception are known to be risky, however a lack of empirical data often means that the projects will get the green light and then fail miserably.  The organizations inability to accurately asses risk/return at any time with their software development investments is a huge blind spot and keeps us from consistently delivering the value that the organization needs to stay competitive.

Agile addresses the value (return) part of what the Efficient Frontier speaks to however it talks nothing of Risk overtly.  Risk is more implied with the notion that we manage it by delivering in short increments and focus on shipping value consistently.  However Risk is more quantifiable as I mentioned earlier.

Building an Efficient Frontier in the investment world is a data intensive effort, which our current product/software development processes doesn't easily support.  However I believe that we can use the formula that Markowitz created to generate an Efficient Frontier for Product and Software Development organizations.

For this effort we will make some assumptions with respect to the Frontier model and changes to Markowitz's formula so that it works with our limited data set:

1. Portfolio = Product Development
   1. An organization can have several Products in their Portfolio -
      1. Consumer Facing
      2. Internal Facing
      3. Infrastructure
      4. Research and Development
2. A security is equivalent to a Scrum Team.
   1. These would equate to the individual securities that Markowitz speaks to in his model.  Where an investment portfolio consists of many securities, each with their own risk/return profiles so to does an organizations product development portfolio consist of the same.  Each team is a security that can on its own provide return that comes with an associated risk.
   2. Though we don't think of investment securities as having dependencies (as software development teams have) in fact a diversified investment portfolio consists of a range of investments that will perform a certain way based upon the dependency that business has to the market that they operate in, so in this case the notion of a portfolio still holds as a viable means to build a Product Development Efficient Frontier.
3. Potential Risk Parameters:
   1. Development Lifecycle - Waterfall, Agile, RUP, XP, Blended (use at macro level). You could equate this potentially to Bonds, Stocks or other investment instruments.
   2. Experience of Team
   3. Number of Scrum Teams
   4. % Test Automation
   5. Code Complexity
   6. Speed to Market
   7. Roadmap volatility

In my next post I'll provide some supporting ways we can 'build' an efficient frontier for Agile Product Portfolio analysis that both Product and Program Managers can utilize to assess priorities for the entire organizational backlog.