In a period of high economic fluctuations, you need an agile budgeting process – one that guarantees money can be allocated quickly when it’s required. It might seem logical that iterative development requires iterative funding, but this concept is hard to put into practice for many traditional businesses. Budgeting remains one of the more conservative functions in an organization, and therefore resistant to change.
Yet if the process of making funding requests and gaining approval remains mired in layers of bureaucracy, it can kill a transformation – a lesson that one large Danish agency business discovered to its detriment. Its established practice of reviewing funding annually ended up stifling innovation, as it was unable to keep pace with the customer-facing teams that had adopted agile ways of working. These teams were waiting months to find out whether they would get the funding they needed.
Dynamic processes for reallocating budgets should happen throughout the year. Every quarter, the CFO reviews the company’s strategic priorities and ensures resources are allocated to organizational units in a way that supports them. The CFO also decides whether units are making progress against strict key performance indicators (KPIs). Funds are then reallocated accordingly. Hereafter, the heads of organizational units are free to decide how the money is spent, reprioritizing or reallocating funds between teams in the unit monthly, weekly, or even daily. In addition, there is a separate pot of money for “venture funding”. Anyone with a new idea can pitch for funding every quarter, ensuring new ideas can be tested without delay.
This kind of agile budgeting process ensures not only that the best projects get the funding they need to stay alive or prosper but also that the less promising ones are axed. Although running hundreds of pilots is a great way to cultivate entrepreneurial energy and generate ideas, without a disciplined process for weeding out the bad ones, resources are squandered. So if a project is not in line with strategic objectives, or if KPIs and deadlines have been repeatedly missed, then funds should be withdrawn quickly.
Do not, however, fall into the trap of wanting the entire budget to be allocated in this way. Significant parts of the budget should not be agile, such as spend for the risk function. As a rule of thumb, 60 percent of a company’s budget should be allocated in the usual way, 30 percent through an agile budgeting process, and 10 percent reserved for venture funding.