What are Lean Budgets?

Lean Budgets in the Scaled Agile Framework (SAFe) focus on funding value streams over projects, streamlining value delivery, and minimizing the bureaucracy of conventional project cost accounting.

SAFe Lean Budgets - What are SAFe Lean BudgetsLean Budgets in SAFe represent a paradigm shift in financial governance within Agile environments. Traditional project funding methods often clash with Agile principles due to their rigidity and focus on fixed outcomes. This mismatch can hinder or even impede the adoption of Agile methodologies in organizations. Lean Budgets address this issue by aligning financial governance with Agile values and principles.

The concept is based on funding ‘value streams’ rather than individual projects. A value stream in Agile is a series of steps that an organization uses to build solutions that provide a continuous flow of value to a customer. Funding these streams directly, rather than discrete projects, allows for more flexibility, responsiveness to change, and a focus on delivering value.

This approach contrasts sharply with traditional project-based funding. In conventional settings, budgets are often allocated to specific projects with defined scopes, timelines, and expected outcomes. This can lead to inefficiencies, as funding is tied to project plans that may quickly become outdated in a dynamic business environment.

With Lean Budgets, organizations adopt a more holistic view of investment. They focus on the long-term value creation of entire value streams rather than the short-term outputs of individual projects. This allows for a more adaptive, responsive approach to investment, aligning it with the Agile principle of responding to change over following a plan.

Changes required when implementing Lean Budgets

Decentralization of Decision-Making

This concept in Lean Budgeting involves shifting the authority for financial decisions closer to those directly involved in the work. Teams working on specific value streams or projects are given the autonomy to make budgetary decisions within the broader constraints of the overall budget set by the organization.

The rationale behind this decentralization is that the teams are more intimately aware of the needs, challenges, and opportunities in their specific areas. This proximity allows for quicker, more relevant, and more effective financial decision-making.

However, this does not imply unrestricted spending. Decentralized decision-making operates within the strategic framework and budgetary limits set by higher-level management. This approach balances the need for autonomy with aligning with organizational goals and constraints.

Continuous Funding Cycles

In traditional budgeting, organizations typically follow an annual budget cycle. However, in Agile and Lean environments, continuous funding cycles are adopted. This means funding is reviewed and adjusted more frequently instead of setting a budget annually.

These intervals are often aligned with Agile iterations or Program Increments (PIs) in SAFe, ranging from a few weeks to a few months. This alignment ensures that funding decisions are responsive to Agile teams’ rapidly changing needs and priorities.

Continuous funding cycles allow for greater flexibility and responsiveness. They enable organizations to adapt to changes in the market, technology, and project requirements more swiftly, ensuring that resources are always aligned with the most current organizational needs and priorities.

Objective Measures of Progress

Traditional project management often relies on financial metrics like cost variance and return on investment (ROI) to measure progress. However, the focus shifts to value-based metrics in Lean and Agile environments.

These metrics assess progress based on the value delivered to the customer or the business. This could include factors like customer satisfaction, market impact, quality of deliverables, and speed of delivery.

Using value-based metrics aligns measurement with Agile principles, prioritizing customer value and business outcomes over strict financial parameters. This shift in focus helps ensure that projects and teams are not just staying within budget or meeting financial targets but are delivering real, tangible value to the business and its customers.

Project Budgeting Challenges

The Problem with Project Cost Accounting

The problem with traditional project cost accounting lies in its inefficiency and inaccuracy, hindering agile and value-driven decision-making in organizations.

Traditional project cost accounting, typically used in many enterprises, presents multiple challenges, significantly impacting the agility and effectiveness of organizations. This conventional approach often involves siloed organizational structures, where numerous cost centers contribute resources to a single project. This method, while standard, leads to various inefficiencies:

Slow and Complicated Budgeting Process

Large technology projects under this model are often bogged down by the need to navigate through multiple organizational silos, requiring approvals and contributions from various cost centers and functional managers. This complexity slows down the budgeting process, delaying project initiation and progress.

Inaccuracy in Decision-Making

Early-stage decision-making in traditional budgeting occurs under high uncertainty, often called the ‘cone of uncertainty.’ Decisions made too early, with minimal information and learning, lead to poorer choices. This lack of early-stage flexibility prevents effective validation of assumptions and experimentation, which is essential for informed decision-making in project portfolios.

Lower Performance Due to Temporary Teams

The traditional approach often involves assigning individuals to projects temporarily, after which they return to their functional areas. This practice disrupts the continuity of learning and engagement, negatively affecting individual and organizational performance.

Delays Caused by Dependency on Specialists

Project teams in traditional settings often depend on specific individual skills, leading to bottlenecks when specialists are unavailable. If tasks overrun, people assigned to them may have already moved on to other projects, causing further delays and reducing the quality of outcomes.

Full Resource Utilization Over Fast Value Delivery

Traditional project management maximizes resource utilization, assigning individuals to multiple projects simultaneously. While aimed at efficiency, this approach can lead to economic losses due to long queues, project delays, and high project timelines, and cost variability. Studies suggest that reducing the average planned utilization rate to around 80% could significantly reduce development times, enhancing overall efficiency.

These challenges highlight the need for a more agile, flexible approach to budgeting and resource allocation, such as Lean Budgets, which focus on funding value streams and prioritizing rapid value delivery over rigid project structures and full resource utilization.

The Impact of Project Cost Accounting on Project Execution

Project cost accounting significantly impedes adaptability and innovation in project execution, leading to delays, reduced transparency, and stifled innovation.

The traditional project funding model, based on fixed budgets and resources for the duration of a project, poses several challenges to the adaptability and execution of projects:

Inflexibility to Adapt to Change

Once a project is underway, changing business needs often require modifications to the project. However, the rigidity of the traditional funding model, with its fixed budgets and personnel allocations, makes it cumbersome to change plans without incurring significant overheads for re-budgeting and reallocating personnel.

Delays and Increased Costs Due to Change Control

Work often takes longer than planned due to new learnings, insights, and opportunities. Managing changes typically involves a change control board, which adds more delays and decision-making overhead. This process slows the project and increases the cost of delays.

Negative Impact on Culture and Transparency

The project model can hinder cultural change and transparency. In overruns, the need for re-budgeting and project accounting often leads to a blame game among project managers and financial teams. This environment fosters information hiding, reduces productivity, and lowers employee morale.

Adverse Impact on Other Projects

Schedule overruns necessitate variance analysis, re-planning, and budget adjustments. This often results in personnel being shuffled between projects, adversely affecting the performance and timelines of other projects.

Stifling Innovation

Traditional project funding models can stifle innovation. Innovation inherently involves risk and uncertainty, making estimating such projects difficult. Organizations may underinvest in innovation to minimize perceived risks, eroding the value of their solutions. The cultural challenge of stopping projects that do not meet their objectives further exacerbates this issue, contrasting with an environment where continuous investment in innovative solutions is encouraged, and the fast failure of experiments is seen as integral to learning.

Traditional project cost accounting practices are often at odds with the need for flexibility, adaptability, and innovation in project execution. They can lead to increased costs, delays, reduced morale, and an overall decrease in the value delivered by projects. Lean Budgets, which focus on funding value streams and adaptability, offer a promising alternative to these challenges.

The Lean-Agile Budgeting Approach

The Lean-Agile Budgeting Approach, as advocated by SAFe, revolutionizes financial governance by minimizing overheads and enabling decentralized decision-making, shifting away from traditional cost accounting methods and rigid project-based planning.

Funding Value Streams instead of Projects

Funding Value Streams instead of Projects is a core principle in SAFe’s Lean Budgets, emphasizing investing in continuous delivery pipelines rather than discrete, short-term projects.

In the SAFe framework, the portfolio budget is allocated to Development Value Streams rather than individual projects. A Development Value Stream is a sequence of activities that deliver one or more business solutions, and each value stream receives a budget for its operation. This approach offers several key advantages:

Empowering Local Content Authority

By funding value streams, decision-making authority moves closer to those with the most information. This proximity to the work facilitates faster, more informed decision-making, as decisions are made by those directly involved in the value stream.

Enhancing Transparency and Visibility

Allocating budgets to value streams rather than projects offers clearer visibility into how funds are spent. It makes the flow of portfolio business epics and enablers transparent and traceable from ideation through implementation using tools like the portfolio Kanban. This visibility aids in tracking the progress and impact of investments.

Increasing Productivity of Knowledge Workers

Long-lived, stable value streams and Agile Release Trains (ARTs) are more productive than temporary project teams. This stability fosters more profound understanding, continuity, and expertise within teams, leading to higher productivity.

Enabling Self-Organization

With value stream funding, teams can self-organize to address the most critical work without needing higher-level management escalation. This autonomy allows for quicker responses to changing priorities and needs.

Improving Budget Management

This approach grants ARTs and Solution Trains more autonomy, providing the right balance of oversight and flexibility. Budgets for a Program Increment (PI) are often fixed or easy to forecast, simplifying financial planning.

Sustaining Funding Despite Variances in Feature Completion

Unlike project-based budgeting, where delays in feature completion can impact the budget, in value stream funding, features that take longer than expected do not change the overall budget. This allows for a more predictable and stable financial environment.

Funding value streams align with Agile principles by focusing on sustained value delivery over time rather than discrete, time-bound projects. It enables organizations to be more adaptive, responsive, and efficient in their use of resources, driving better outcomes and value delivery.

Funding by Investment Horizons

Funding by Investment Horizons in SAFe is a strategic approach that balances investments across different stages of solution development, akin to managing a diversified financial portfolio.

Lean Budgets - Investment Horizons.In SAFe, investment horizons categorize solutions and initiatives based on their maturity and expected time to deliver value. This approach, partly adapted from the McKinsey model, helps make more informed investment decisions and align the portfolio with strategic themes. The SAFe investment horizon model classifies investments into four categories:

Horizon 3 (Evaluating)

This horizon focuses on investigating new opportunities for future growth, typically within 3-5 years. Investments here are exploratory and research-oriented, often involving innovative solutions or fundamental changes to the business model. Funding is usually modest, and these initiatives can be somewhat isolated from the current operating model. Initiatives that prove viable and offer a compelling return on investment move to Horizon 2.

Horizon 2 (Emerging)

Horizon 2 encompasses investments in promising new solutions from Horizon 3. These are anticipated to provide a profitable return within 1-2 years. The business is willing to make ongoing investments in these solutions, recognizing their potential for future returns. These initiatives may require resources from Horizon 1 and need to be managed carefully to ensure they reach maturity.

Horizon 1

This horizon represents solutions that deliver more value than their current investment cost. It is divided into two profiles:

  • Investing: Solutions that require significant ongoing investment, possibly due to market or solution immaturity, technological changes, or growth strategies like capturing market share.
  • Extracting: These are stable solutions delivering high value with less need for additional investment. Funds here ensure sustained value, profit, and cash flow, supporting emerging solutions in other horizons.

Horizon 0 (Retiring)

This horizon involves investments in decommissioning solutions that have reached the end of their life cycle. Managing this phase efficiently frees the budget for more promising investments in other horizons.

Managing these horizons effectively involves evolving solutions, introducing and retiring them, managing technological changes, and responding to market demands. The portfolio budget guardrails help make these investment choices, ensuring a balanced approach that promotes the overall health and growth of the portfolio.

Using Participatory Budgeting

Participatory Budgeting (PB) in SAFe is a collaborative process where stakeholders collectively decide on allocating the portfolio’s budget across various solutions and epics.

In SAFe, Participatory Budgeting is an event within Lean Portfolio Management (LPM) that involves stakeholders from different areas of the organization. The process ensures that value streams receive the necessary funding to advance their solutions and align strategy with execution. Here’s how it works and the benefits it offers:

  1. Collaborative Decision-Making: During a PB event, stakeholders are grouped, typically comprising five to eight individuals from various roles and value streams. This diversity promotes a broad understanding and perspective.
  2. Allocation of Funds: Each participant receives an equal portion of the total portfolio budget, a list of solutions and epics, and their requested funding. The participants then collaboratively allocate their budget portions to these requests.
  3. Consideration of Total Funding Requests: For instance, if the total requested funding is 46 million and the available allocation is 40 million, each participant in a five-member group would allocate 8 million.
  4. Decision Dynamics: The goal is generally to fully fund solutions and epics to consider them for actual funding. Since not all items can be supported, participants must negotiate and collaborate to identify the best investments. This often involves pooling budgets across different value streams to support initiatives that no single stream can fund alone.
  5. Benefits of Participatory Budgeting:
    • Insightful Leadership: Provides leaders with diverse insights and perspectives.
    • Strategic Alignment: Creates alignment on challenging funding decisions.
    • Enhanced Engagement and Morale: Improves stakeholder engagement and morale.
    • Efficiency in Implementation: Reduces the time and overhead involved in budget allocation.
  6. Guardrail Adherence and Recommendations: In post-PB sessions, teams discuss how their choices adhere to investment horizon guardrails and may adjust their investments. These sessions also allow teams to make recommendations to increase or decrease investments in specific solutions or epics, reflecting the collective wisdom and experience of the group.
  7. Finalization of Budgets: The outcomes of these forums are analyzed by LPM, which then finalizes adjustments to the value stream budgets in alignment with the agreed-upon funding strategy.

Participatory Budgeting in SAFe thus democratizes the budget allocation process, ensuring a more holistic and strategic approach to funding within the Agile framework. This method fosters a collaborative environment where diverse perspectives are valued, leading to optimized value delivery across the portfolio.

What is the Scaled Agile Framework (SAFe)?

SAFe is a framework for scaling Agile principles across large organizations, with LPM as a component ensuring strategic alignment.

SAFe Requirements Model Big PictureSAFe is a structured methodology that aids enterprises in applying Agile practices and principles at a larger scale. It creates a synchronized, collaborative environment that promotes alignment, transparency, and delivery across multiple teams. Within this system, LPM acts as the bridge that connects the strategic goals with the execution tasks. It ensures that all Agile teams’ efforts are directed towards fulfilling the strategic intent, maximizing value, and reducing waste.

What are the SAFe Core Competencies?

SAFe Core Competencies are a set of seven capabilities essential for achieving Business Agility.

SAFe Core CompetenciesThe Scaled Agile Framework (SAFe) defines seven core competencies, and they are:

  1. Lean-Agile Leadership: Inspires adoption of Agile practices.
  2. Team and Technical Agility: Enhances team capabilities and technical skills.
  3. Agile Product Delivery: Delivers customer value through fast, integrated delivery cycles.
  4. Enterprise Solution Delivery: Manages large-scale, complex solutions.
  5. Lean Portfolio Management: Aligns strategy and execution.
  6. Organizational Agility: Enables quick, decentralized decision-making.
  7. Continuous Learning Culture: Encourages innovation and improvement.

These competencies provide a roadmap for organizations to navigate their transformation to Lean, Agile, and DevOps practices.

What are the SAFe Principles?

The SAFe Principles are a set of ten fundamental principles derived from Lean and Agile methodologies that guide the implementation of SAFe.

SAFe principles are guidelines derived from Agile practices and methods, Lean product development, and systems thinking to facilitate large-scale, complex software development projects. The ten principles that make up the SAFe framework are as follows:

  1. Take an economic view: This principle emphasizes the importance of making decisions within an economic context, considering trade-offs between risk, cost of delay, and various operational and development costs.
  2. Apply systems thinking: This principle encourages organizations to understand the interconnected nature of systems and components and prioritize optimizing the system as a whole rather than individual parts.
  3. Assume variability; preserve options: This principle highlights the importance of maintaining flexibility in design and requirements throughout the development cycle, allowing for adjustments based on empirical data to achieve optimal economic outcomes.
  4. Build incrementally with fast, integrated learning cycles: This principle advocates for incremental development in short iterations, which allows for rapid customer feedback and risk mitigation.
  5. Base milestones on an objective evaluation of working systems: This principle emphasizes the need for objective, regular evaluation of the solution throughout the development lifecycle, ensuring that investments yield an adequate return.
  6. Make value flow without interruptions: This principle focuses on making value delivery as smooth and uninterrupted as possible by understanding and managing the properties of a flow-based system.
  7. Apply cadence, and synchronize with cross-domain planning: This principle states that applying a predictable rhythm to development and coordinating across various domains can help manage uncertainty in the development process.
  8. Unlock the intrinsic motivation of knowledge workers: This principle advises against individual incentive compensation, which can foster internal competition and instead encourages an environment of autonomy, purpose, and mutual influence.
  9. Decentralize decision-making: This principle emphasizes the benefits of decentralized decision-making for speeding up product development flow and enabling faster feedback. However, it also recognizes that some decisions require centralized, strategic decision-making.
  10. Organize around value: This principle advocates that organizations structure themselves around delivering value quickly in response to customer needs rather than adhering to outdated functional hierarchies.

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