What Is Lean Budgeting?

Today’s organizations need the ability to adapt their portfolio budget in response to changes in the market, new information, and other disruptions.  However, traditional project-based funding simply does not allow for this kind of flexibility.

The solution according to SAFe®—the world’s leading framework for scaling Lean-Agile practices—is to change the way we think about portfolio investment and governance altogether.  This new approach to budgeting is called Lean Portfolio Management, or LPM for short.

Instead of allocating money based on projects, LPM organizes investments around value streams (the end-to-end flow of value to the customer), resulting in a process that is far more responsive and adaptive to market and customer needs.

 

Who Manages LPM?

LPM is, at heart, a decentralized process, in which the teams doing the work have the authority and ability to advocate for changes in the budget to stakeholders at the Portfolio level.

These LPM stakeholders should not be seen as all-powerful autocrats who decide who gets the budget arbitrarily.   They should, however, be seen as stewards of the budget responsible for optimizing value streams based upon feedback received throughout the development process.

If this seems scary, or confusing, do not worry.  SAFe gives Portfolio executives the tools they need to make tough decisions by using four Lean Budget Guardrails.

What are Lean Budget Guardrails?

Lean Budget Guardrails are policies and practices that members of the LPM team can leverage and use to make informed budgetary decisions.  These guardrails help maintain a healthy balance of investments across value streams and time horizons, so that every area of the enterprise gets the appropriate funding at the appropriate time.

The four Lean Budget Guardrails are:

• Guiding investments by horizon;

• Applying capacity allocation to optimize value and solution integrity;

• Approving significant initiatives; and

• Continuous Business Owner engagement.

Today, we will look at the first of these: Guiding investments by horizon.

 

Guardrail 1: Guiding Investments by Horizon

It is important that we are strategic and tactical in the allocation of the multi-million dollar budget that we, as Portfolio Leaders, govern and oversee.  As we do this, SAFe encourages that we should invest in the present day (i.e. the near-term), but also be tactical whereby we contemplate and allocate a portion/percentage of the portfolio budget to the future (i.e. the long-term) for overall strategy and growth.

Thus, the “Guiding Investment by Horizon” guardrail places a strong focus on timing as a consideration while we strategize and allocate the overall portfolio budget.  By doing so,  we can optimize the budget with an eye towards the whole versus partaking in budgetary allocation based on antiquated models such as project-by-project (Waterfall) and/or year-by-year (Waterfall).  Thus, the Guiding Investment by Horizon guardrail functions to ensure that a good “mix” of investments exist to prevent routinely underfunding or overfunding certain efforts.

As you will see in the figure below, in the Guiding Investment by Horizon model, each Horizon represents a stage in the process relative to time.  Horizon 1, for example, represents the present-day / current-year solutions and encompasses immediate/near-term opportunities that we are considering as an organization.  These near-term opportunities should be funded, but funding should also be allotted and considered for future solutions that reside in our time window and  thus upcoming Horizons (e.g. Horizon 2 & Horizon 3).

 

 

As we consider funding for these future Horizons, we are ensuring that we are partaking in a mix of investments and thus diversifying the portfolio budget by investing and accounting for current (i.e. near term) opportunities while also accounting for opportunities for our long-term strategy and growth as a company.

For example, a front-loaded budget solely focused on Horizon 1 may be under-investing in future solution innovations, hence, creating long-term risk for the company.   This can be avoided by moving funding into future time horizons to open up the possibility for funding upcoming innovation.

In Conclusion

As Lean Budgeting is instituted, it is incumbent upon LPM leaders to be strategic and conscious of how the portfolio investment is distributed.   Just as it is important for leaders to be cognizant of present-day opportunities, it is also just as important that they are cognizant of long-term opportunities.

By balancing the Portfolio budget across time horizons, we can achieve a more responsive, adaptive, budget as an organization going forward.