4 Reasons to Choose Lean Budgeting over Project Cost Accounting
Feb 1, 2021
Are you stuck in traditional budgeting approaches and looking for an alternative?
If you feel like you're wasting your energy working on products that are obsolete, then you are not alone! Most companies are beginning to wake up, realizing that Project Cost Accounting doesn't allow for the agility needed to adapt to your customers' ever-changing needs. The success of a project should not mean meeting pre-defined scope with rigid timelines and initial requirements!
If you want to create a valuable product that the customer adores, then consider Lean Budgeting (LB). LB is an approach to fund initiatives without the traditional restrictions of pre-defined rigid scope and timelines. It provides strategies to eliminate the overhead of traditional project-based funding and cost accounting. It maintains appropriate oversight by providing guardrails and value-stream budgets. With LB, enterprises can have the best of both worlds – a development process that's responsive to the market and accountable management of spending.
In my experience, I've seen four areas where the LB is far superior to Project Cost Accounting. Below I've highlighted these areas and provided context for the difference between the two approaches.
1. Continuous Customer Engagement
In Project Cost Accounting, the customer is not involved in determining if the solution is successful. Instead, success is measured by meeting arbitrary dates and a predetermined scope. Even if the teams have met the dates and scope, they might not have created a product that is valuable for the customer. That is not success.
In Agile, a consistent and transparent relationship is built with the customer. The customer assures your teams that business value is being enhanced throughout development. Based on customer feedback, your teams only build what is valuable regardless of whether they are IT teams or Business teams.
Prior to using LB Guardrails, I've seen many teams build a product to the initial requirements written many months (or even years!) prior to the completion of the project, only to have the customer completely disappointed with the end result because it didn't meet their expectations or it no longer met the market needs. Customer engagement throughout the duration of the planning horizon assures that your time (and money) is not wasted on an outdated product.
2. Decentralized Decision Making
The rigidity of Project Cost Accounting discourages autonomy and decentralized decision making. Decisions are made up front and can't be altered. Project Cost Accounting doesn't allow for variance from the original approved plan without a scope change and approvals up the chain.
Agile, on the other hand, allows your teams to make decisions quickly. They can make efficient, incremental progress without waiting for a bottleneck decision-making body. Not only does this lessen the burden on top management, but it also allows for more accurate decisions by those who are fully aware of the reality of the situation.
I've seen teams wait weeks or even months for executive management to make a decision on something that impacted one team. That team could have easily resolved the issue on their own. The impact to both morale and the product can't be undersold.
As I mentioned earlier, in a traditional planning model, a pre-defined scope with specific timelines is funded annually; neither scope nor timelines are evaluated or modified throughout the year.
LB Guardrails allow your product to evolve throughout the planning horizon. When the funding is released at the beginning of the horizon, there isn't a formal static list of requirements that teams must follow. As the product evolves and customer feedback collects, teams have the flexibility to create what will provide business value that meets the customers' evolving needs.
I've witnessed a customer identifying a feature that didn't meet their needs and then their delight when that feature was quickly descoped so something else could be prioritized. I've seen entire products de-funded because the initial proof-of-concept didn't bring the anticipated return on investment.
Instead of throwing more money after an approach that doesn't answer your business need, reallocate the funding to another initiative! The flexibility to quickly evaluate and pivot assures that your company is spending money on initiatives that meet the needs now, instead of waiting until the end of the planning horizon to determine success. An even worse scenario is continuing to work on a product when you know it won't meet anyone's needs.
4. Product Lifecycle Visibility
In a typical traditional planning approach, the funding for a project is assigned for a year without looking at the life of the product. But the product is ever-evolving! Prior to creating a new product, when a concept is being explored, the funding model will be different versus when a product is being retired or decommissioned.
It's critical that funding is available for the life of your product. LB Guardrails provide guidance on identifying and funding a product throughout its lifecycle. In my experience, without these guardrails, companies have a tendency to spend heavily on a new product, without evaluating the viability of the new product in the market. Additionally, they spend very little on products that are “stable” and the backbone of their enterprise. By evaluating all initiatives in the horizon model, you can be assured that funding is spent on the correct initiatives and keeping the foundational applications stable, secure, and continually providing business value.
What Does the Transition Look Like?
Moving from Project Cost Accounting to Lean Budgeting can be daunting. It requires commitment and collaboration from many parts of the organization. First, you'll need to link strategic themes to products in preparation for the funding discussions. This will allow you to eliminate waste by not funding work that doesn't tie to a strategic theme. You'll want to have the key decision makers part of the Participatory Budgeting process to determine where the funding will be spent and assure buy-in across the organization. Plus, you'll need to look at Governance to make sure the requirements for your industry are incorporated. And of course, for successful LB, the customer must be involved and committed to the product throughout the lifecycle. It requires giving the power of defining the product to the customer and letting it evolve through the planning horizon. That being said, once the LB foundation is in place, your organization will reap the benefits without the Project Cost Accounting headaches I mention above.
Are you ready to transition from Project Cost Accounting to Lean Budgeting? ICON coaches have experience enabling customers with sustainable, evolving improvements, including streamlining approval, funding and governance.
Written by Cathy McGraw