Value-driven technology funding: aligning investment mechanisms with software excellence

One of the common missteps I see executives make (including me earlier in my career!), is trying to operate within the funding structure presented to them. What is available regarding funding and accountability mechanisms probably wasn’t selected with software development in mind. Or it may serve the convenience of another group in the organisation unaware of the potential side effects.

It can be easy to assume that funding mechanisms are fixed and you just work within what appears to be available. It can also be easy to think that the impact will be small. The mismatch between the decisions about the work and how it is budgeted for creates friction, which occurs frequently and creates barriers to doing the right things to achieve sufficient software quality.

What if we could have the transparency these traditional approaches are trying to provide with flexibility that removes wasted time and money? The good news is you can.

We will explore both interim measures you can start with and full measures which may take some time to agree on (in one company where I was CTO, it was at least a year, possibly two, into the role).

The unwanted side effects that come with inappropriate funding approaches

There may be a Project Management Office for which it is convenient to organise work into programmes and projects, align funds and budgets to these and treat them similarly to all other work in the organisation. Sometimes the finance team or CFO thinks about new spending as an initiative. They would like to know when new expenditures will likely start and finish. Or maybe the Human Resources team wants to provide the CEO with some visibility on how the workforce is allocated.

Whatever the reason, the intent is rarely malicious; it solves the part of the problem they are exposed to and the other effects occur well outside their visibility. If we understand what the people responsible for the mechanisms are trying to achieve, we can look at alternatives that may serve those and software development needs.

A classic example is that line items for spending were identified at a point in time when there was less information and changing these triggers an approval process elsewhere in the organisation. This may be manageable if it happens a few times a year. But I’ve seen cases where it may occur for each developer multiple times a day and the approvals may take up to six months or more to resolve.

I won’t claim it is impossible to work within these constraints. It’s not. I’ve done so numerous times, as have most successful CTOs. However, the cost of effort and elapsed time to achieve sufficient quality can be multiplied many times until it’s addressed – and I observe many successful CTOs who are effective at influencing change in this area and, in doing so, free up energy for themselves and their teams to redirect in more productive improvement. There are strategies you can apply in the interim to try to minimise the impact. Still, in my experience, it’s worth working towards a more wholesale change, step-by-step – especially when a large software development team is involved – to address the issue entirely.

Fund value, not projects

As I intimated earlier, there has been a shift towards organising teams around value to address the continuous nature of software development. In many cases, the budgeting processes at these companies are yet to keep in step with these changes.

This can create a range of activities that don’t add value or improve the work’s governance. Things such as:

• Permanent teams trying to match project proposals to established teams and being blocked or disbanded if approval cannot be achieved in time
• Being required to get approvals for routine activities, even for things that occur many times a day

The alternative to address some of these is to think of funding permanent teams as base-level funding – for example, part of your cost base – a concept familiar to your finance team and how they manage other spending. This will typically be for software for which the ongoing experience must be sustained or improved over the long term, like how aspects in different business areas need to be maintained, such as customer service or service delivery management of IT services. Plenty of precedents exist in most organisations for managing long-term maintenance and improvement. So why should we feel limited in how we think about software development funding?

If you are a CTO, you may have only been presented with the option of funding the investment like a project, but your organisation’s mechanism for funding it differently almost always exists. Knowing how the different departments of a business manage their responsibilities and what they are trying to achieve opens up options for you to evolve the way this works.

Regardless of your views of the large software development scaling frameworks, some of the most helpful guidance they provide is specific advice on how to fund software development differently – which can translate to better quality software and, therefore, better user experiences.

It’s beyond the scope of this post to cover in detail, but it’s helpful to know that most of these frameworks suggest that software teams organise around the value they provide and the users they serve. It is no accident that this is a crucial recommendation in most of these methodologies, as this has been a repeated source of friction working against team success.

You don’t need a big framework to tell you how to do this though. Here I highlight some opportunities that you can apply incrementally over time to shift how software development is funded and managed in your organisation and progressively reduce unnecessary friction for people making the right decisions more often.

Funds flow like an undulating stream

When we think about a company’s spending and revenues, there is an effort to account for our position at a point in time. It’s trying to consider what’s owed and projected, what has been and will be spent etc. To simplify thinking about a company’s financial position, a lot of static views of the company’s finances are created.

Unfortunately, these are limited because they are static and have traditionally taken time to balance the books and ensure accuracy. Anything we are looking at is likely up to 30 days’ old or worse from the point it’s available and ages from there. In the modern age, electronic spending and accounting tools, procurement tools, expenditure tracking, Enterprise Resource Management (ERM), Customer Relationship Management (CRM) and a whole ecosystem of tools. make it more possible to have a more real-time view and projected views of spending.

Applying the same concepts of managing cash in our wallet to spend in a complex organisation simply doesn’t scale. Yet if you listen to the attitudes of many people when they speak of spending or cost control, they define it in these terms. Organisations constantly have funds flowing in and out and growing organisations do not have an absolute baseline for spending. Instead, the cost baseline grows over time and all other spending is relative to that baseline and what it is projected to be. Growth companies spend based on their aspired growth, not based on where they used to be.

I find it easier to think of spending more like an undulating stream. Money flows in as revenue and out in expenditure. Various factors influence the ebbs and flows of available capital. There may be ebbs due to increases in expenditure or reductions in revenues which require management, such as the rate you are spending. Growth is linked to what we are investing in and the resulting value is captured in the form of revenue. Unsurprisingly, most executives I’ve met in medium-sized companies or larger share a similar view – although they may use different analogies.

Executives of growth companies manage spending less by looking at individual line items and available budget at the point in time, but by looking at the run rate of spending overall and how different categories of spending aligned to our theory of what is valuable are contributing to that run rate. By ‘run rate’, I mean what we spend per period of analysis (often watching the trend of spending weekly, fortnightly or monthly). They find ways to empower others across the organisation to make spending decisions, while remaining in a position where cost control and accurate forecasting outperform other methods.

The intersection of organisational strategy and funding

Most organisations confuse strategy with planning. The strategy is the choices you make and planning is the consequence of those choices. How you evolve the strategy involves planning, of course, so I am empathetic to the confusion and acknowledge they are part of a continuum.

What is critical about knowing strategy is the choices an organisation makes. It’s about what you’ve chosen to do and what not to do. Applied to finite funding, strategic choices help make good use of the funding constraints. It is better to fully fund something that can be seen through and maximise its potential than to partially fund many things that are never completed or which are badly compromised to the degree that undermines performance.

Adaptive funding and value streams

Software that provides ongoing service to a group of people is a stream of activities that are all related to contributing to something valuable for a particular set of users. Activities such as the ongoing maintenance and improvement of the software support the continuing fulfilment of its intended purpose. This method of organisation is often described as ‘value streams’ – and this approach cuts across other organising structures, such as functional organisation, so there is end-to-end visibility of all the activities that provide value to a stakeholder.

The benefits of approaching the work this way are ensuring continuity between these activities, reducing wait times between activities and maximising information flow between contributors to achieve the highest possible performance. Ultimately, this translates into the most efficient use of resources for the best possible outcome – minimising wasted effort, reducing time to benefit and maximising quality. Organisations will often try to compromise on these to do ‘more’ overall. Instead, they will do less everywhere due to everything taking longer, being of lower quality, and many things never being finished and requiring rework to address quality issues.
Grouping funding into ongoing value streams creates the opportunity to align spending decisions with the priorities that best address the needs of the stream’s beneficiaries. It also tends to be less granular and thus supports greater autonomy within the team focused on supporting the value stream and less on supporting functions elsewhere in the organisation. This doesn’t mean that appropriate transparency isn’t provided – it just doesn’t need to be a blocking mechanism, such as an unnecessary approval step that exists, not because of careful process design, but purely due to misaligned boundaries of responsibility. You can create spreadsheets or a database logging planned and actual expenditures to create sufficient transparency. These can help individuals within value streams coordinate with each other and keep on top of the financial resources they have available. These intents and actuals can be logged manually or with automation or even piggyback on the transaction journaling finance teams’ systems already have. This data also makes forecasts straightforward and more ‘real-time’.

Using these approaches produces more accurate forecasting, which I know can convert your CFO from sceptical to converted. It’s more precise because it updates as plans evolve and actual spending happens, reducing the time between reconciliation.

Cross-functional collaboration on budgets

Adaptive funding also allows funds to be spent in ways aligned with the people working together. For example, for functionally arranged budgets, a team in different roles reporting to different budget holders may need multiple approvals to do something together that benefits the value stream they are working on. In this way, the budget mechanism is a counterincentive to the desired collaboration. Doing the right thing is on the path of resistance rather than the path of least resistance.

Is spending in balance across artificial boundaries?

Traditional approaches to budgeting across departments lend themselves to allocations centred on the needs of each department rather than the needs of the organisation. Most organisations’ interactions are far more interrelated across departments. In the modern era, spending needs to be aligned more than ever or risk impacting the effectiveness of any actions because a department has the means to spend but another department it relies on does not.

Such decision making can also be a factor across annual budgets. A cost-centre mindset may have led to minimisation of spending on technology and other services perceived to be enablers leading to flat spending that has fallen out of proportion with the growth of the organisation. Given most growth companies are seeing technology and product-fuelled growth and innovation, ensuring that investment is commensurate with the growth appetite is paramount.

Funding envelopes, more frequent budget reviews and partial allocation

Traditional budgeting often assumes funding is fully allocated. An alternative is to assign only part of the available funding – for instance, the financing of the first quarter – and leave other funds unallocated until the more frequent review cycle. This can reduce the ‘use it or lose it’ mentality, leading to inefficient spending on lower priority needs because that was where the funds happened to be allocated.

It can also address the issue of making spending commitments at a point in time before adequate information is available to make a good decision. For example, when making decisions during annual budget cycles about technology where there are too many unknowns about the user needs, other dependencies etc.

In terms of frequency for budget review, quarterly is a sensible step for organisations previously tied to an annual planning cycle, but it’s not unusual for organisations to shift such reviews to monthly if they were already quarterly. More of this responsibility and ownership moving to the department or value stream level makes such frequency possible.

Decision making relating to the use of funds

An often-unanticipated consequence of traditional budgeting approaches is that budget allocations can diminish decision-making autonomy for the people with the most information. Value stream funding and partial allocation can push down decision authority from senior leadership to team and individual levels, while empowering leadership to make strategic decisions such as sizing investment for value streams or identifying new value streams and their funding needs. In this way, authority can match the breadth of context people have.

This can be achieved by working with the finance teams on updating the Delegated Authority Matrix or similar mechanisms in use. For instance, all decisions of spending for a particular product line may be held by an individual or even an empowered committee or other governing body.

Consider funding maximisation over cost minimisation

Most of this post is about the mechanisms for using funds, but I can’t gloss over the fundamental question – ‘Are there adequate funds to do what is needed?’. The amount of available funds is important and can directly relate to your strategic thinking. You may have limited funds further diminished by an inability to say no and focus on investment where it can have the most impact.

A lot of thinking about spending is devoted to cost minimisation. How little can we spend? It is good to know how to spend efficiently and eliminate waste. Still, it is also essential to know if that is compromising the result or trading spending on tools, materials or services, which instead is now being consumed in opportunity cost because it adds additional labour effort, meaning you are getting less impact from the core of your cost base – the investment in the organisation’s people.

One way to turn this thinking on its head is to look at opportunities and consider the maximum you would spend to achieve the result. For instance, you might need to reduce your cost to acquire new customers – which you know could ultimately improve the company’s profitability. How much is that worth to the organisation? Were there options that don’t seem viable through a cost minimisation lens but might seem affordable in this lens because of how it ‘grows the pie’?

This is something you can quantify. Short-changing a potentially strategic investment because it seems comparatively expensive is routine in most organisations I’ve observed. Compromising potentially game-changing improvements to how the organisation can compete just so that it can accommodate less critical activities in its portfolio makes the organisation less competitive. And yet, most organisations place themselves in this position because of how they organise reviewing decisions around spending. Bucketing up different spending by function dilutes the attention on the strategy and shifts thinking to what is a fair investment level for each department, each with boundaries rather arbitrarily determined by which groups possess which skills rather than by what is valuable overall to the organisation. You may increase the focus and available funds for the most vital work and, if you find more efficient and faster ways to achieve the goal along the way, you can reallocate it later.

If you are applying the other concepts from this blog, a great foundation for applying this inverted thinking is to consider how maximising investments will translate into a better return on investment and won’t translate into more spending unless it’s warranted. This is because it helps us ‘put more wood behind fewer arrows’, which can help you say no to investments that dilute the strategic focus of the organisation, creating some efficiency – with further efficiency coming from the adaptive budgeting mechanisms covered.

Assessing the alignment of investment mechanisms with value delivery

This post has run through the areas where traditional funding practices can create friction with value-oriented practices for critical growth in the modern era. I’ve identified in accessible language how adjustments in approach – most of which use existing capabilities already available within most finance teams or straightforward practices that can be adopted by teams that you empower with more authority relating to expenditure.

These practices can address – not only the friction which works against organisations achieving the value and growth they desire – but also can improve upon the governance traditional practices are seeking to provide. Forecasting can be more accurate and more transparency on spending decisions is possible.

To summarise, I recommend reviewing the following key questions as a leadership group:

• Are we clear on our organisational strategy and is that helping us identify what is critical to invest in now? This does not require a perfect strategy, but it does require a view of how the organisation will succeed and choices made about what it will and won’t be doing
• Is our spending, even if it’s organised by department, aligned so we know our most significant initiatives are fully funded and prioritised and department boundaries are not causing unnecessary friction to ‘doing the right thing’?
• Have we empowered those closest to where the need is to make timely spending decisions to support the fast flow of value?
• Have we established adaptive mechanisms which enable us to stop ineffective investments sooner or commit/reallocate spending at the last responsible moment rather than annually?
• Is software development investment in proportion to the growth of the company?
• Are we limiting ourselves to thinking about what we can achieve with the least amount of spending? Or can we agree on a funding ceiling for how much we are willing to spend to achieve our imperatives?

For CEOs and technology leaders, I recommend engaging your CFO and working in partnership with them on these changes. Some changes may require patience to rework systems or adjust the categorisation of expenditure or delegated authority and compromises which can work in the interim. What I can say is it helps to understand what the CFO is trying to achieve and to seek win-win solutions where they exist.

I can heartily recommend the Beyond Budgeting website as an indispensable guide to these and similar practices, a resource I lent on heavily as CTO for practical ideas and principles that can be applied to increase the pace and value achieved whilst still meeting important governance objectives.