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Field Guide

Capacity-based Funding Model: The Essential Field Guide

This is a guide to moving from project-based to a capacity-based funding model.

The pace of change is increasing and organisations who can adapt quickly, can leapfrog the competition. Ways of working are evolving and the way outcomes and work are funded also needs to evolve. There is no one size fits all perfect solution, so taking an incremental approach to changing is how you can continuously learn and improve how you fund and invest in outcomes.

Jon Smart, Sooner Safer Happier

"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)"

Organisations are expected to do more with less, and can not committed to projects that takes years to prove value. Most people can recall a project that continued to be funded well after it was over time, budget and scope, referred to as the "escalation of commitment."

Organisations working in modern ways, 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, there is far less focus on if the money is being spent and more on if they money being spent is yielded the outcomes being sought after.

From the Tuckman stages of team development: Forming, Storming, Norming and Performing. Teams stay together, teams are the unit of delivery, teams are stable, not static. Teams become high performing over time, project based funding breaks teams apart and impedes the ability for teams to become high performing.

This is usually referred to as an investment hypothesis or bet, to signify the organisation is investing in solving a problem, rather than in a specific solution / set of deliverables. Customers / consumers will tell you (directly or indirectly) if what was delivered, is valuable, having telemetry is needed to provide you that rich view on the data.

Being able to pivot on your investment hypothesis, is what enables greater business agility, however this is only true if teams are planning work in thin slices (work that can be independently delivered over time), rather than a deliverable that may span multiple quarters and cannot be stopped half way. If teams are planning and delivering work incrementally, that means the teams can pivot with very little waste. At worse, the next quarter will need adjusting.

Planning outcomes to be delivered into shorter periods (e.g. a quarter or less) and delivering value incrementally, allows teams to rapidly find out if what is being delivered is generating the desired outcomes.

For further reading check out How should I fund agility by our partners at Sooner Safer Happier.

Project-based funding challenges

As mentioned in TeamForm’s Field Guide to Funding Models, a funding model determines your organisation's ability to adapt to change. This can impact your ability to innovate and deliver value to customers.

If your organisation is using modern ways of working and you haven't changed from project-based funding, then "how you work" and "how you fund" will be at odds with each other. As such, you are likely to observe the following:

  • Quickly shifting priorities is painful, teams are committed to longer term deliverables, that cannot be easily stopped.
  • High administrative effort in preparing business case documents, which are rarely used to measure the value delivered.
  • Traditional business cases are often created in isolation to justify funding, resulting in a disconnect between the teams and the work.
  • Project-based funding often requires onerous processes such as time booking and slide-driven status updates.

What is a capacity-based funding model?

A capacity-based funding model aligns funding to 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 pre-defined 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 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 is focused on explaining the cost calculations by investment type, one of the next things to consider is how you provide a portfolio view of the types of investments you have. It is fair to say that traditional business cases are not effective, they existed mostly as a mechanism to secure funding and with moving to capacity-based funding that same need no longer exists.

There is still a need to qualify why a particular outcome should be invested in, this can be done with a simple one pager to enable portfolio level prioritisation discussions. This is a common practice in lean portfolio management. At a high-level, this approach would cover the outcomes, the metrics (including key results), how this ties to broader product or company strategy and what results you would expect to see in the next quarter.

Tip: Sooner Safer Happier offers a light weight canvas if you want to try!

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 etc.
  • Wire your applications end-to-end with clarity on which system is responsible for producing what set of data e.g. which system owns cross-functional team structure and membership
  • Remove redundant processes such as time booking 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 (e.g. your work management application)

Wiring work to investments - step by step

Step 1: Fund capacity of the team-of-teams (aka Value Stream / Tribe / Crew) - establishing the budget of the team of teams is best initially based on historical capacity / work / investments.

Step 2: Define your investment types.

The below are common set of investment types used in large complex financial services organisations.

  1. Enabling - Focuses on making the product(s) easier to change over time, including technical debt, simplification etc.
  2. Strategic - Focuses on product / organisational strategy e.g. new markets / customer segments
  3. Mandatory - Focuses on work that the organisation deems “must-do” such as regulatory compliance or certain types of risk remediation
  4. Improvement - Focuses on improving the existing product through refinement, maintenance, automation, product and process etc.

Step 3: Define the different types of work that can exists within the parent work. Types of work shown below is adopted 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 (e.g. in Jira, Rally, Azure DevOps Boards, ServiceNow etc).

Step 6: At the end of the period (e.g. quarter) use your work management tools (e.g. Jira / Rally etc) and reporting / 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: 

1. Budgeting for team of teams based on capacity for the time period

2. 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. The information can be de-emphasised in how you present the data as you move the focus to outcomes and OKRs.

If greater capacity is needed, the team of team / value stream can shift capacity of existing teams. e.g. shift Team A's focus from discretionary work to regulatory work for 3 months. In a project based funding approach, this would require changing people and composing 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 (e.g., value points, t-shirt sizes, etc. ). These all have their own susceptibility to be gamified which leads to adverse behaviours. We also 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

Tackling such a complex space can be daunting at first, it is definitely achievable once you break it down into sizeable experiments. At TeamForm we can offer you technology and experience to help you through this journey. Below offers some high level call to actions of what you can do 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 (this can be done without changing the existing model to start)
  • Define  success measures to measure experimentation outcomes i.e. 5%-10% deviation from timesheet costing, 1 FTE of administrative and coordination effort reduced, etc
  • Provide dedicated resourcing and prioritised focus from all interconnected supporting teams 
  • Define the funding guardrails of interest that you want to trial with, continue to refine these are you progress
  • Run in parallel using both capacity based funding and using time sheets to show any variance
  • Reflect on learnings, communicate / champion the outcomes
  • Refine approach and discuss with your finance team on the next steps to change any relevant systems and processes

Additional Considerations

You can experiment by treating the existing approach as if it is capacity-based. Have your team of teams / 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 / oversights along the way. Parallel runs can be effective in making a case / building up confidence. Ideally organisations are focused on outcomes / OKRs (and other metrics e.g. 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 is you have strong capitalisation requirements. This will depend on your finance teams input and overall appetite to look at outcomes and metrics. This approach is compatible for cross-cutting initiatives as well that may have once off accounting treatments like impairments etc. This should be the exception, as you focus on shorter term investments around outcome hypothesis with long-lived teams.

Capacity-based funding is an enabler to unlocking new ways of working, adopting a fit-for-purpose financial process takes time and requires strong collaboration and transparency from a number of  teams, such as  Audit, Investment and the transformation office.

Supporting materials

Sooner Safer Happier

IT Revolution:


Nick Brown “story pointless” series: