- Investment planning for technology is typically done annually, ideally, by holistically prioritising projects to fund based on competing demands across business.
- Due to the limited known scope of an agile development process, traditional investment does not work in an agile organisation, but it is critical that planning and tracking does still happen centrally.
- Quarterly reviews and planning are an effective way to address ambiguity, ensuring increased control and minimised risk when it comes to budgets.
Imagine if someone asked you to answer the following question, right now and with reasonable certainty and accuracy: what will your total expenses be for the coming year?
For most, it would be an overwhelming query. Longer term visibility is something everyone involved in financial planning seeks, but knowing the amount of money needed for the year ahead is difficult given we have no foreknowledge of the events that may or may not occur.
For the individual, this can be stressful and many prefer to ‘wait and see’ what happens. For business, however, where planning is mandated, it is necessary. Even more alarmingly, the accuracy (and inaccuracies) of this predicted spend will be directly input into stock prices of listed companies.
The cost estimates that go towards answering the above question are usually managed by a corporate finance team, and with more and more business spend dedicated to technology, it is critical that this team has a strong handle on its investment.
What is technology
Technology investment planning is typically done once a year. Based on business demand, technology initiatives are developed and proposed jointly by the business and IT teams for funding. Some of these initiatives are mandatory, due to risks, regulation changes and so on, while others will need a strong business case to secure funding.
Technology initiatives — be they applications, new features or an integration between applications — are designed for business outcomes. The benefits the technology will bring, such as cost reductions or an uplift in revenue, will be used in determining whether or not a project gets funded.
In traditionally run companies, all these initiatives, and their estimated costs, will add up to the budget for the financial year. This ‘portfolio’ of proposed initiatives will be reviewed by the finance team and money set aside for those approved.
In an agile organisation, however, the business outcomes of technology investment tend to remain variable throughout execution – changing, albeit iteratively, over the year.
Funding in an
Organisations that work in an agile way incrementally build technology capabilities, one change at a time. Since the ‘false certainty’ of long-term delivery plans is no longer there, drawing up long-term technology investment plans can be a bigger challenge.
While unlocking flexibility, three features of agile delivery hinder the once-a-year development and funding of a traditional tech initiative portfolio. Firstly, the annual benefits of agile tech builds are not always evident upfront. The outcomes are also not guaranteed, as stopping or continuing a project (in agile terms ‘an epic’) is purposefully dependent on built-in decision points. And finally, the amount of money needed – for future teams, or iterative changes (‘sprints’) – are top-down ‘guesstimates’ based on previous parts of the project.
Agile’s objective is to unlock flexibility, so quite rightly, businesses ask if a centrally planned technology budget still makes sense. In some ways, yes. This way of planning future spend is critical to ensure that:
- Tech investment is aligned to overarching strategic business priorities
- Tech transformation efforts across the business functions are not duplicated
- All dependencies are checked and impacts are assessed and addressed
- Financial returns across the portfolio are maximised
Moreover, finance departments must manage reporting across all business functions, both internally and externally. Thus, for any business (in agile or any other mode), technology investment planning is a must.
How to plan
while staying agile
A more flexible approach is increasingly necessary as more and more organisations begin to adopt agile. Misalignment between agile and traditional investment planning stems from two main intrinsic problems:
- Scope/outcome ambiguity: Investment planning needs to divorce itself from a well-defined and trackable long term scope over a longer timeline (such as the annual spend)
- Lack of clear timelines: Despite not having a strong grip on the full scope/outcome, the planning process needs to instill effective financial controls for progress and changes, such as in tracking and reporting.
Agile ways of working can be aligned with the traditional financial planning process – after all, each has varying degrees of managing scope ambiguity and delivery control. The key objective is to set up the initial budget for a portfolio of initiatives and then consistently measure value returned throughout the delivery lifecycle.
In the simplest method, businesses can use historical data to develop a traditionally-planned budget, have it approved for funding and then allocate it to projects based on their variables (team size, duration, rates). The return on value (for example, the features developed and benefits realised) is tracked by checking in with the project teams at an agreed frequency.
While it would be too much detail to go into here, there are of course multiple ways to determine the original amount of funding required. Program level cost estimates (based on team size, time, contingencies) or allowable costs based on estimated benefits and internal expectation of ROI.**
However, in the end, dynamic ways of determining investment are, we think, optimal for an agile business. Organisations that utilise quarterly business reviews (QBRs) at an enterprise level, enable a periodic revision of the investment portfolio every quarter – essentially enabling quarterly investment planning. Funds are planned only for the next quarter – after which the business (as a whole) revisits the returned value of investment at a holistic level and can revise funding based on priorities.***
Quarterly business reviews are a broader vehicle for unlocking enterprise agility. Their use drives alignment and builds autonomy within organisations while realising business strategies in an agile way. In the reviews, organisations measure business outcomes to help focus and enable the output committed to each quarter.
Leveraging these, quarterly investment planning (QIP) is also one of the most successful means to align effective investment planning with agile methods as they ensure an investment plan based on the priorities and the upcoming work of the next quarter (both IT run and change-related).
There are two key inputs to quarterly investment planning that ensure accuracy and control – business priorities for the upcoming quarter and results from the previous quarter. Together they provide a level of clarity to draw up an accurate investment plan for the next three months.
QIPs also address CAPEX/OPEX allocation in an agile workplace. Actual capitalisation is done at the end of every sprint and hence becomes more accurate because it is worked out on the basis of output and the development team has a strong input in determining what can be capitalised.
Quarterly investment planning
for year-long benefits
Quarterly revisits and refinement of investment plans will unlock the flexibility benefits of agile work, while financial governance processes become more effective, ensuring a business truly gets ‘bang for its buck’. While the question ‘what are you going to spend this year?’ remains as daunting as ever, reimagining it to ‘what are you going to spend this quarter?’ is much more manageable, malleable and ultimately, agile.
*These areas can be further broken down into six discrete issues which the ‘Agile Investment Planning’ process should be able to address (see fig: Misalignment between agile and traditional investment planning).
** For example, if the present value of benefits is $2.3m, and the ROI expected is 15%, $2m is the allowable maximum present value of cost.
*** At the end of the spectrum, there is a dynamic funds consumption model – where initiatives can tap in central technology funds (almost on-demand) as long as they have strong business rationale. This model gives maximum flexibility and change control to deliver any scope or outcome. However, it also results in a lack of prioritisation (as there are timing differences among funding requests) and significant overheads (due to repetitive process execution) — eating into the efficiency benefits that agile unlocks.
For more information on how to use technology to drive change, visit PwC Australia’s Technology Advisory website.