Capacity-based Funding Models: The Essential Field Guide
From Project to Capacity Funding Models
Executive Summary
As organizations face a rapidly changing environment, adapting swiftly has become crucial for maintaining competitiveness. Traditional project-based funding models are increasingly misaligned with agile and outcome-oriented ways of working, often leading to inefficiencies, such as an over-reliance on long-term deliverables, excessive administrative burdens, and "escalation of commitment" to failing projects.
To address these challenges, a capacity-based funding model is proposed. This approach funds stable, long-lived, cross-functional teams (teams-of-teams or value streams) based on their capability and capacity to deliver value over time. Key benefits include greater agility, reduced bureaucracy, and enhanced focus on outcomes rather than budget utilisation. It emphasises:
- Incremental Delivery and Learning: Teams plan and execute work in manageable slices, allowing for rapid validation of value and pivoting with minimal waste.
- Outcome-Oriented Investment: Funding decisions are framed as hypotheses to solve problems rather than deliver specific outputs, with metrics guiding success measurement.
- Simplified Processes: By digitizing team structures, removing redundant practices like time tracking, and automating cost attribution, organizations free teams to focus on delivering value.
- Portfolio-Level Alignment: Investment types (e.g., strategic, enabling, mandatory) are defined and used to guide prioritization and portfolio management, tying financial investments to business outcomes.
A transition to capacity-based funding requires careful planning and incremental experimentation.
This guide provides actionable insights and tools for implementing capacity-based funding, helping organisations modernise their approach to work and funding to thrive in an era of continuous change.
The pace of change is increasing. Organisations that adapt fast are poised to leapfrog the competition. As ways of working evolve, the method by which outcomes and work are funded must also evolve. However, there is no perfect one-size-fits-all solution, so taking an incremental approach to this change, learning and improving as you go, is the way forward.
"As long as you're in the business that you are in, you need to continuously improve, continuously innovate, 'evergreen' your value offering. Standing still is not standing still, it's going backwards. Not treating Value (Products) as long lived, results in the need to slash and burn, replace at a later date, for a higher cost (here we go again)"
- Jon Smart, Sooner Safer Happier
Organisations are expected to do more with less, unable to commit to projects that may take years to prove value. On the other hand, most people can recall a project that continued to be funded long after it had gone over time, budget and scope, otherwise known as the "
escalation of commitment."
Organisations with a more modern approach adopt long-lived cross-functional teams as part of teams-of-teams (aka value streams) and orient around the flow of value. When capacity is funded rather than the project, there is far less focus on whether the pot of money has been used in full and more on whether the money that has been spent is yielding the outcomes sought.
If we look at the
Tuckman stages of team development: Forming, Storming, Norming and Performing, we understand that teams perform better when they stay together. Teams are the unit of delivery and should be stable, not static.
Teams become high performing over time. Project-based funding eventually breaks teams apart and prevents them from reaching their full potential.
This team-focused approach to funding is usually referred to as an investment hypothesis or bet, to signify that the organisation is investing in solving a problem, rather than in developing a specific solution or set of deliverables. Consumers will tell you (directly or indirectly) if what you have delivered is valuable - your metrics will give you the insights you need.
If an organisation can pivot on its investment hypothesis, it should increase business agility, but this is only the case if teams plan work in thin slices (that can be independently delivered over time - a quarter or less), rather than a deliverable that may span multiple quarters and cannot be stopped halfway. If teams plan and deliver work incrementally, they can rapidly find out if it is generating value, and if not, pivot with little waste. At worst, the next quarter will need adjusting.
For further reading check out
How should I fund agility by our partners at
Sooner Safer Happier.- Shifting priorities quickly is painful because teams are committed to longer term deliverables that cannot be stopped easily.
- Considerable time is spent on admin to prepare business case documents, which are rarely used to measure the value delivered.
- Traditional business cases to justify funding are often created in isolation, resulting in a disconnect between the teams and the work.
- Onerous processes such as time tracking and presentations to deliver status updates.
What is a capacity-based funding model?
A capacity-based funding model aligns funding with persistent cross-functional teams based on the capability and the capacity required to deliver one or more products over a period of time.
This is different to traditional project-based funding, where the allocation of funds is against a predefined work breakdown structure. Project-based funding doesn't usually take feasibility into consideration and doesn't allow teams to focus on things like technical debt or maintainability.
Capacity-based funding moves focus from business case theatre to the delivery of value: measuring the outcomes and the impact.
Capacity-based funding simplifies the process for the people doing the work, allowing them to spend more time working and less time on bureaucracy.
Incremental Steps
The remainder of this guide focuses on explaining cost calculations by investment type. It is also important to consider how to provide a portfolio view of your investment types. It is fair to say that traditional business cases are not effective for this purpose, they exist mostly as a mechanism to secure funding and once you move to capacity-based funding that need no longer exists.
That said, you should still qualify why a particular outcome deserves investment; a simple one-pager will suffice for portfolio-level prioritisation discussions. This is a common practice in lean portfolio management and will cover the outcomes, the metrics (including key results), the connection to broader product or company strategy, and what results you would expect to see in the next quarter.
Before adopting a capacity-based funding model:
- Map your application (system) landscape for systems that interact with work, people, cross-functional teams, funding, blended rates, outcomes/OKRs and so on.
- Wire your applications end to end, being clear as to which system is responsible for producing what set of data for example,which system owns cross-functional team structure and membership.
- Remove redundant processes such as time tracking with the approach outlined below.
- Create an automated capitalisation process that is auditable, leveraging the underlying data captured and attributed from a system of record (for example, your work management application).
4 key elements to capacity-based funding model
Budgets are based on cost of people and jobs / capabilities required to deliver the products and services that teams work on (often funded at a team-of-teams level):
- Budgets are based on cost of people and jobs / capabilities required to deliver the products and services that teams work on (often funded at a team-of-teams level)
Why we recommend this:
This allows an enterprise to have flexibility to pivot between work priorities with the right capabilities which will be a cost based on work that needs to be done rather than traditional head count budgeting.
In addition this will also allow return on investment tracking to be accessed on whether a piece of work has delivered enough value rather than anchored on whether all the milestones have been delivered because money was budgeted for it - Enterprises have defined guardrails on the different investment types, work types and the level at which work types are mapped into the investment types
Why we recommend this:
This removes the pressure and accuracy of individuals to accurately monitor their % of effort / time spent across multiple project codes and just focus on the work they need to deliver to. - Actuals against budget are a % split of investment type and amount of work completed within the period by the team of teams (including the team level)
Why we recommend this:
Timesheeting will ideally be removed through the adoption of this capacity-based funding model, instead, consider leveraging data from the work management tools as an alternative evidence of activity. - Adoption job / capability based rate cards to support planning if a financial lens is required. For example rate cards for software engineers, quality engineers, product owners instead of individual based salary rates
Why we recommend this:
This removes the complex thinking from having to plan at a people level such as seniority, type of contract and impacts on rates to the focus of planning on the skill sets required to deliver on the work.
Wiring work to investments - step by step
Step 1:
Fund capacity of the team of teams (aka Value Stream / Tribe / Crew).
In the first instance, establish the budget of the team of teams based on historical capacity, work and investments
Step 2:
Define your investment types.
The below are common sets of investment types used in large, complex financial services organisations.
- Enabling - Focuses on making the product(s) easier to change over time, for example, technical debt, simplification.
- Strategic - Focuses on product / organisational strategy for example, new markets or customer segments.
- Mandatory - Focuses on work that the organisation deems “must-do”, such as regulatory compliance or certain types of risk remediation.
- Improvement - Focuses on improving the existing product through refinement, maintenance, automation, product and process, and so on.
Step 3:
Define the different types of work that can exist within the parent work. The Types of Work format shown below comes from the Flow Framework
Step 4:
Define the highest level of work item that is mature enough to be used for mapping of work.
The work taxonomy in the example is an illustration of how work can be broken down. Organisations customise the language and assign their own value to what each work item means.
Step 5:
Adopt a single backlog for the team of teams including all types of work including delivery and operations items (for example, in Jira, Rally, Azure DevOps Boards, ServiceNow).
Step 6:
At the end of the period (for example, quarter) use your work management tools (such as Jira, Rally) and reporting or BI solution to calculate the following views to show how work is tied back to investment types and converted into an approximate financial view.
Calculating a cost view
There are 2 key concepts to calculating a cost view:
- Budgeting for team of teams based on capacity for the time period = Total cost of team of team / time period
eg: Quarterly budget for team of team = $12M per year / 4 quarters = $3M per quarter - Cost attribution to delivered work based on capacity funding
The result of this calculation is intended to be approximately accurate and should be featured less when it comes to communicating progress in a forum such as a QBR. This information can be de-emphasised when you present the data as you move the focus to outcomes and OKRs.
If greater capacity is needed, the team of team or value stream can shift capacity of existing teams. For example, you might shift Team A's focus from discretionary work to regulatory work for 3 months. In a project-based funding approach, this would require you to change people and set up new teams, and likely take far longer to deliver value.
Why did we choose to use the count of work items?
Organisations could use other options as a “currency” of work (for example, value points, t-shirt sizes). However, these can all be gamified, which leads to adverse behaviours. We recommend a great blog series on the lack of correlation between size / duration of work and story points, see:
Story Pointless (Part 1 of 3).Taking your first steps
Funding is such a complex area that it can be daunting to even attempt to change it. Nonetheless,once you break it down into sizable experiments it will feel much more achievable. At TeamForm we offer you the technology and experience to help you on this journey. Here are some high-level recommendations for how to get started:
- Digitise your organisation's team structures in TeamForm
- Conduct a quarterly experiment in a mature area to determine the extent and design of the change in an iterative approach (initially, this can be done without changing the existing model)
- Define success metrics to measure experimentation outcomes, for example, 5%-10% deviation from timesheet costing, 1 FTE of administrative and coordination effort reduced
- Provide dedicated resourcing and prioritised focus from all interconnected supporting teams
- Define the funding guardrails of interest that you want to use for your trial, continue to refine these as you progress
- Use capacity-based funding and time sheets in parallel, to show any variance
- Reflect on learnings, communicate, and champion the outcomes
- Refine the approach and discuss with your finance team which systems and processes may need to change and how
Additional Considerations
You can experiment by treating the existing approach as if it is capacity based. Have your team of teams or value stream leads prioritise the outcomes for the period and take a soft approach to seeing how it works.
Incremental steps will reveal any gaps or oversights along the way. Parallel runs can be effective in making a case and building confidence. Ideally, organisations will focus on outcomes or OKRs (and other metrics, for example, North Star Metric) to drive the conversations around prioritisation and capacity.This change in behaviour and acceptance takes time and social proof so sharing progress from others within the wider organisation is a great way to get someone more sceptical on board.
Using investment types is one way to enrich the data. You may opt for a simpler CapEx vs OpEx approach if you have strong capitalisation requirements. This will depend on your finance team’s input and overall appetite to look at outcomes and metrics. You will find the approach is also compatible with cross-cutting initiatives that may have one-off accounting treatments, like impairments. However, this should be the exception not the rule, as you begin to focus on shorter term investments based on outcome hypotheses with long-lived teams.
Ultimately, while adopting a fit-for-purpose financial process takes time and robust cross-functional team collaboration, capacity-based funding is an enabler to unlocking new ways of working, driving greater satisfaction for your teams, and more value for your organisation.
Supporting materials
Nick Brown “story pointless” series:
