A decade ago, the majority of IT projects were delivered using a traditional waterfall or waterfall-like methodology. The execution of these projects was preceded by a long planning and budgeting phase, typically lasting 6-12 months. Only initiatives with a carefully prepared business case would pass the gate of the budgeting process and would be taken into next year’s project portfolio with a fixed budget, timeline and scope.

This process served the CFO organization the most: the simple boundaries of IT projects made accounting, controlling and procurement relatively straightforward. However, the length and rigidity of the whole process would typically result in an oversized scope, a tight schedule, belated market verification, no room for changes, – and ultimately, an alarmingly low chance of success (depending on the source, 10-30% of waterfall projects finish on-time, on-budget and on-scope).

Evolution in IT delivery

Times have changed, and the IT industry responded with the rise of agile methodologies. Nowadays, digital solutions are built mainly using agile methods, predominantly Scrum and Kanban. Forming a Scrum team, nominating a product owner, maintaining a product backlog, working in short sprints and using a Kanban board have become standard. The methods enable early validation of ideas and technologies, an enhanced ability to react on changes, and ultimately result in lower cost for the same or more value.

However, agility ceases to exist in many cases as soon as the solution has been shipped. More often than not, delivering version 1.0 also means the immediate dissolvement of the delivery team and the application’s merger into a service catalog of IT operations. When improvements are needed - which happens to all productive solutions - a new project will be budgeted, staffed with potentially new team members, and ramped up with high effort. This is a long, scattered, and expensive process.


Performance and efficiency require stability

Many organizations have recognized the value of forming stable cross-functional product teams by integrating the IT delivery squads into the product management organization on the business side. This does not only result in higher performance and efficiency over the whole product lifecycle: the product-oriented approach also sets the focus on delivering customer and shareholder value, instead of simply shipping something on-time on-budget (like in project management).

This fundamental shift in focus implies that decision-making becomes far-sighted, ultimately leading to:

  • improved product performance: better alignment of IT to the actual needs and business goals due to the value creation focus;

  • higher quality: less technical debt and incidents as product development and operations are in one hand;

  • greater employee satisfaction: due to the more sustainable approach; and consequently

  • more efficient and effective use of available resources that results in better bottom line results.

Financing the modern organization is a challenge

However, the financing needs of product-oriented delivery are in conflict with traditional budgeting that follows the old patterns: allocations are based on business cases and thus are tied to strict deadlines, scope and budget. The outcome of the budgeting procedure is essentially still a set of projects and programs. The decision-making process behind is often focusing on short-term targets, heavily limiting the advantages of modern product-oriented methods.

Having the known boundaries of traditional budgeting in place, product teams cannot respond to changes in the environment fast enough, since they have to deliver on a predefined scope and timeline. The required level of continuity is not given either, as short-term shifts in priorities may force teams to get dramatically downsized, only to be scaled up a year later again.
To realize the advantages of modern product development methodologies, it seems inevitable to align corporate budgeting to the requirements of these methods. But how exactly could this be done? Which factors need to be considered in the design of the new budgeting scheme?

The following list presents the most important requirements:

  • Product development should no longer be financed through individual projects and programs. Products should be allocated their own budgets.

  • The product budget should be derived from the product roadmap which is continuously adapted and detailed by the product team (rolling planning).

  • The product budget should cover multiple years or at least the expected budget for the subsequent few years should be given so that team up/downsizing can be planned in a sustainable fashion. Please note that unexpected high-level corporate budget reductions can lead to a team headcount decrease but very likely would not cripple the product organization. In the traditional world instead, where budgets are allocated on a lower level, cuts affect entire projects – which can result in a complete halt of work on a product.

  • More competences should be delegated to the product teams. The product manager should be responsible for the structuring, usage and control of the product budget. Of course, this does not mean that product management is freed from any kind of governance – it affects above all the granularity of the scope the product budget is tied to. In the corporate budgeting process, only low granularity should be expected (extract of the product roadmap).

As of today, there is no silver bullet for establishing the perfect corporate budgeting process for the modern age. However, the need for change is clearly present, the requirements are taking form and leading organizations should tackle the challenge now.