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The Annual Budgeting Process – It Can Use Some Improvement

Over the years, I’ve had the opportunity to work with a wide range of managers and executives. Some had a very IT-centric education and background while others were decidedly non-technical. Most were command-and-control types while others viewed themselves as servant-leaders long before that description was popularized. The majority were calm and reasonable while blessedly few were screamers. If I were to assemble all of these people in a single location and ask their opinions they would not agree on much. Except for one thing – their dislike of the annual budgeting process. Since most 12-month budget cycles are started 3-4 months before the cycle begins, managers are asked to accurately predict what will happen in their organizations 14-16 months thereafter. They are asked to describe funding requirements for projects that have not yet been conceived and their performance will be judged by their adherence to a budget which is merely a wild guess. As organizations have attempted to apply agile principles at scale, managers have discovered that the annual budgeting process is not only disliked, it impedes organizational performance because:

      1. The extensive up-front effort to define and analyze project business cases yields little useful decision-making data and results in green-lighting projects with limited business value

        2. Project cost-overruns result in shifting funds from valuable early-stage projects in order to complete an over-budget project for which the business case is no longer valid

          3. It is difficult to reduce resources on approved projects to work on newly-identified opportunities with greater business value

So, how do we fix this dreadful process? Following are some sources of ideas for applying lean | agile principles to budgeting:

The Scaled Agile Framework (SAFe) proposes that, in lieu of project-based allocations, budgets should be based on funding long-standing teams organized around business value.

The Lean Startup book recommends Innovation Accounting for new products

The Lean Enterprise book advises the reader to eliminate project-based funding processes and separating funding decisions from the annual fiscal cycle

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