This course was created by Joanne Molesky. We are pleased to offer this training in our library.
Skill Level Intermediate
- So unit one, we're going to talk about the Pitfalls of Classic Financial Management, particularly as it relates to software delivery, product delivery, digital products, whatever you want to call it. The main concern we have is that conflation and misuse of a process leads to financial mismanagement of this type of work. The Beyond Budgeting Institute and I highly recommend it as a resource in this area has made the statement that "Annual budgeting is at the core "of all our management problems within an organization". There's a lot of things wrong with budgeting and if you've ever gone through the pain of an annual budget, I don't have to tell you what they are. Many of us can make a list as long as our arm to do that. But basically the big upfront annual budgeting process does a couple of things that really go against our idea of how to work as lean organization and provide innovation and improvement in an organization. The first thing it forces us to work in large batches. 18 months before you actually are going to spend money, you're asked to tell everybody, how are you going to do it? That causes a lot of big upfront planning that is unnecessary. It also forces you to work on suppositions and often fabricated information. Who knows what the price of something is going to be 18, even 12 months out from the future. It creates long feedback cycles, yearly instead of weekly, biweekly, even daily. It forces a silo work of view because most of our financial management systems are organized that way. So instead of thinking end-to-end product flow we actually think about organizational functional silos. And probably the worst thing about using budgets in the process is that the outputs of the budget process, are you on time? Are you on budget? Are you in scope? Are often used as a key performance indicators as saying if you can do those things you're creating value, and this is not true. In the end, it creates a competitiveness and general bad behavior within organizations, because if you got the money, you can do what you want to do. If you don't have the money you suffer, you're not able to do a good job and you get punished. The first major problem with the annual budget process is it conflates too many processes into one thing. So instead of just budgeting, which is really a good thing you want to know how much you're spending, how much you've got to spend, and are you actually within those boundaries that you have set for yourself? But it also forces you to set your targets and that's usually set by the executive and not the teams actually doing the work. It also forces you to forecast far out into the future, which is not a budgeting issue. It also forces you to do resource allocation in large batches and long-term, and again resource allocation doesn't necessarily have to be tied to budgets. And the last one is cost control which is really what budgeting is all about. In addition, the whole process is heavily command and control within most organizations. It starts with the executive saying, "Here's our strategy "and here's the tactics that we've decided "that we're going to do "as an organization to reach our strategy "and our long-term goals". It all, also many executive groups will set targets for the people who are actually doing the work without really understanding what the implications of that decision are. They then expect teams to get aligned within there and perform the execution. And as teams are busy doing the work to be able to reach targets that are set by somebody else, they're then forced to work in a certain way, implement in a certain way and there's a whole reporting structure set up, which is quite costly and actually it's often as it moves up the channels of the organization results in some scrubbing and let's just say improvement on the data and information so that what gets to the executive isn't really a true reflection of what's happening. It also then requires as the executive doesn't get enough information to determine whether they've done a good job or not to micromanage back down again and say, "Do a better job by doing it my way". The whole part of the way we design our financial systems often forces organizations or encourages organizations to move in a way that doesn't create end-to-end flow. And if you think of the classic way, organizations have looked at software delivery projects, this is a good example. So the business will say, "We have many good ideas. "We need money to get these ideas going". And the thing about good ideas is usually within business most of them aren't. Studies have shown that approximately 2/3 of our good ideas are either bad or they produce, they don't produce any significant change in the value we're able to create for the organization. Then what happens is the business spends a lot of time creating a plan and getting approvals for the plan, the projects then go up and we need to spend a lot of money to spin up the project, get the resources into the project and do our work. The project will often go, "We are working. "We need money to do that" but without actually delivering something that's demonstrated value, they continue to work. And many organizations fall into that sunk cost fallacy where I've put so much time and energy into a product I can't let it fail. It's very rare for organizations to stop big projects because they're afraid that they'll have to write off the cost of the project, which can be in millions and billions of dollars. In the end, it gets thrown over to IT operations who have to make due with the way it is delivered to them flaws and all and they'll say "This doesn't work, "we actually need more money to make it work properly". Just want to talk about the measurement and performance part of the annual budget. And this is a really sticking point with a lot of organizations, because whether I am a manager and I can actually work within the budget that I submitted and got approved because I had friends who would like me better than the other guys, or I got more money is being used as a key performance indicator to tell how well, how well I manage. All that is a measure of, is how well I'm able to spend the money I said I was able to spend. And we know all the games that people will play to be able to meet that target. Now what happens is that it creates a competitive organization internally where people and managers and operators are working against each other rather than working against the competitor. And we're also basing rewards on the outputs and activities. I was really busy, I did lot of things, here's the money that it costs me, but we never really look at what was the overall outcome for the organization as a whole, as a result of those activities. So most of you're familiar with the annual budgeting process won't go into any more problems with it. I really highly recommend you go to the Beyond Budgeting Institute. But I have some questions for you that might help you figure out where your organization is with this process today. So the first thing I want to ask you is how much time does it take your organization to build and track the annual budget? Just them in the air. Is it months? Is it weeks? Is it days? or is it like I'm working two years out right now? Is the budget set up to help people organize themselves by product end-to-end flow rather than an organization functional unit? IT versus operations versus marketing versus people on the HR. Next question. What happens with your budget process when times are good? What happens when times are bad? Does it follow the same process? Who sets the targets and defines the tactics on how the organization will achieve the overall goals? Is it the executive? Or is it the teams working on it? Who gets rewarded or penalized if they can't meet budget targets? And what's used as criteria for that? And how long does it take to gain approval for funding if you want to experiment with something and you can't prove a return on investment?