Are you Betting on your Budget?
By Pam Ashby | 23 March 2018
The webinar from Steve Morlidge about the Beyond Budgeting approach triggered more than one ‘Aha’ moment. It was a member-only event, so cannot all be shared here, but if you are an Agile Business Consortium member and missed it, you may want to catch up on the recording.
The underlying premise of Beyond Budgeting is that traditional budgeting processes are no longer as appropriate as they once were, given that the economic and business environment in which we operate is becoming increasingly unpredictable. When we cannot estimate or guess what the future will bring, it’s safer to work in short iterations, deliver incrementally and shorten the feedback loop so that delivery teams can learn and adjust as things progress.
A tale of a horse
Steve used a lovely analogy to explain the Beyond Budgeting approach.
“When the future is unknown,” he says, “Budgeting is a bit like a bet. Businesses are betting resources and are hoping that they’re going to win.
“Traditional budgeting is a bit like placing your bets before you’ve even arrived at the race course and seen the form guide! You have no idea what you’re betting on and could end up with a real ‘donkey’.”
He explains how all Agile projects will start with a purpose and a goal. What follows is the strategy that provides guidance on how to fulfil that purpose. When the organisation begins to look at feasibility, this process now begins to need some resource and investment. “This is like placing a small bet,” Steve continues “You’re looking at the horses in the parade ground and making judgements on their basic and overall appearance. This could give you enough confidence to simply place a small bet.
“Then the horse goes into the starting gate. Now things are beginning to happen you can judge how well a horse is performing. This is analogous to your first project iteration, which gives you more evidence about likely outcomes and increases your level of certainty. With this additional information, you may now choose to place another bet (i.e. committing slightly more budget).
“As more information comes in, you’re better placed to make more and better-informed bets, committing more resource to the endeavour. Once the horse has cleared some initial hurdles, you can place an even bigger bet – and so the process continues.”
Data from doing
This horse-racing tale perfectly illustrates the concept of Beyond Budgeting and how it helps ensure that the resource allocation process is better informed, thereby reducing risk as well as promoting agility. However much research is done in advance the best information comes from “having done something”.
Even better, this information also informs the forecast process, so when we place a bet we have a good idea of what we can afford, and we can hold money back as a contingency to reflect the level of uncertaintly in our estimates.
Contrast this with traditional budgeting where bets are placed without updated information on what we can afford.
“The ideal,” Steve concludes, “Is when we allocate money, see better financial results from that investment, and are then able to invest further – thereby creating a virtuous circle.”
Steve Morlidge will be speaking at the Agile Business Conference on 26 & 27 September 2018. You can register at agileconference.org
The material published in the Blog area of this website, is provided independently by our bloggers and any opinions expressed are those of the individuals and not necessarily of the Agile Business Consortium. The Agile Business Consortium does not accept any legal responsibility for any content or opinion published in the Blog area of this website.