Funding Models: The Essential Field Guide

Mark Schwartz, Enterprise Strategist at AWS and author of A Seat at the Table: IT Leadership in the Age of Agility, describes the shift that organisations need to make when thinking about the relationship between IT and the enterprise:

Agile, Lean, and DevOps approaches are radical game changers, providing a fundamentally different way to think about how IT fits into the enterprise, how IT leaders lead, and how IT can harness technology to accomplish the objectives of the enterprise. But honest and open conversations are not taking place between management and Agile delivery teams. (Mark Schwartz)

There’s a reason why funding models are often one of the last areas for an enterprise agility transformation – it’s complex and requires true collaboration at the executive level – but if we want our organisations to achieve the full potential from our transformation initiatives, then we need to transform funding models.

Why do funding models need to change?

Within any enterprise, funding models will ultimately dictate how well you can respond to change and how your organisation can better innovate, adapt, and deliver value to customers.

The main driver of the change of funding models is that the current way of funding “IT projects” isn’t working for most enterprise organisations.

On average, large IT projects run 45 percent over budget and 7 percent over time while delivering 56 percent less value than predicted. (McKinsey, 2013)

Keanen Wold and authors describe the need for change in the white paper “Evolving the Funding Process”:

‍"One of the biggest impediments to this shift is the traditional funding model. While the technology functions in many organisations have adopted various methods of implementing Lean and Agile thinking, many organisations remain stuck in a waterfall, up-front planning model when it comes to budget and fund allocation.
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This manifests itself with a variety of practices contrary to Agile/Lean techniques: annual budget cycles, strict monitoring of team members' time down to the hour to support capitalisation allocation and research tax incentives, a burdensome, paper-heavy-one-size-fits-all funding approval process that creates a fictional view of ‘low risk’."

How do traditional funding models impede enterprise agility?

• Annual budget cycles: With the rise of digital, all businesses have a heavy-reliance on IT to deliver value to customers – waiting for the next round of budgeting that happens once a year doesn’t allow for the necessary and frequent reallocation of budgets that can respond quickly enough to the constantly changing external and internal environment.
• Project-centric operating model, with delivery milestones and pre-determined outputs or deliverables: “Bullet proof” business cases and up-front requirements apply a deterministic approach to what is in reality, an emergent domain – it is impossible to predict what customers will want and what solutions will effectively meet their needs.
• Funding projects emphasises getting work done over outcomes and maintainability: There’s no denying that certain types of work require effective coordination and schedule to meet timelines (e.g. regulatory go live dates, product launch dates etc.). When projects are the vehicle for funding, the people driving the work are incentivised on getting work done, rather than ensuring the products and services are built in a sustainable way.
• Heavy individual time-tracking to distinguish between CapEx and OpEx work contributions: Putting the emphasis on individuals to constantly keep track of how their time is spent is helpful for accounting, but prevents people from doing the jobs they are at the organisation to do.

What does good look like?

Regardless of how your organisation funds work now, it’s imperative to be clear on what the desired outcome looks like.

In the recent 2023 Business Agility Report, adaptive funding models is the biggest predictive indicator of business agility maturity. These organisations excel at shifting funds dynamically from areas of less value to areas of greater potential value in the business.  

In an ideal world, what “good” looks like for funding models:

• Fund business outcomes with a focus on value, so that you can quickly adapt to change: investing and funding outcomes that support the business and product strategy, so that when new information is learned or market conditions change, teams have the authority and flexibility to focus on what’s going to contribute to the outcome, over strict adherence to the agreed-upon plan and deliverables. When funding is tied to specific project deliverables, it forces teams to focus on the wrong things.
• Reallocate capacity based on greatest impact: leaders are empowered to reallocate capacity to areas of greater impact; as more information becomes available, organisations can move work to other teams.
• Funding outcomes and supporting teams: assign funds to value streams with clear, measurable outcomes, without constraint to what the funds go to while also supporting teams to find solutions that meet the needs of customers; this approach encourages experimentation and decision-making at the level that’s closest to the actual work being done while not mandating a specific solution onto teams.
• Flexible funding cycles: decoupled internal funding cycles from external reporting cycles, so that an organisation’s reporting process doesn’t dictate how funds are planned and spent internally.
• Enables teams to focus more on the work, over administrative tasks: traditional funding models require heavy up-lift on individuals and teams to track time against sometimes hundreds of different funding codes; this puts the emphasis more on the administration of time keeping, vs focusing work on delivering value.
• Business metrics, outcomes and customer value drive transparency: rather than status updates, reporting on schedule and percentage completion of work / milestones. If the outcomes are not being realised then a change is needed in strategy or approach. Teams create transparency through team visual management systems (e.g. a board) and link their work through to investments and outcomes (OKRs) creating the golden thread and minimising bureaucracy.

How can you take the first step?

Transforming funding models in enterprise organisation is a long-term journey and isn’t something that can be done over night. What we’ve learned time and time again, is that organisations will never realise their full potential if transformations are conducted in isolation of finance. Ultimately, organisations will hit a ceiling.

With anything change-related, we advocate starting small by creating stronger understanding and alignment before identifying ways forward.

Five key questions that Finance and Change Leaders should align on to improve your organisation’s funding model:  

• What are we optimising for?
• How can we be better partners for the business?
• How can we best organise and fund customer journeys and outcomes rather than projects, systems and silos?
• How can funding processes better support our teams' productivity?
• What should we be measuring? What should we stop doing or measuring?

The answers to these questions will be both confronting and enlightening, but ultimately will help your organisation adapt and improve how you enable your teams for success.

Further learning

Evolving the Funding Process by IT Revolution

How should I fund agility? by Sooner Safer Happier

Funding Model: The Seven Domains of Transformation by IT Revolution

Beyond Budgeting Institute