Blame historical budgeting.

Traditional (historical) budgeting, whether bottom-up or top-down, typically involves taking last year’s revenue and expenses and adding a growth factor to each side of the ledger (usually a higher growth factor on the revenue side than the expense side).  This then sets the playing field for the year ahead (i.e. the revenue that the business needs to bring in and the expense that it is permitted to spend, with the planned profit as the remainder).

The expense is further broken down into capital expenditure (capex) and operating expenditure (opex).  Capital expenditure, in particular, may span over multiple years.  Further complicating matters is that both types of expenditure have rules that dictate what can be categorised as capex or opex (as the categorisation can have a significant impact on financial performance reporting and tax liabilities).

While I understand that many of you reading this article will know most of this already, where I’m heading to is the adverse behaviour that this budgeting approach results in, and what can be done to change it.

So, what are the problems with this approach to budgeting?

The major drawbacks include:

• Internal Focus
• Budget Hoarding by Silos
• “Use It or Lose It”
• Annual Planning Mindset

Much as the term agile has been increasingly used (abused?) in the IT industry to describe a high-performing software development team, Business Agility is now also becoming a term that is increasingly heard in business circles.  Like the term agile, however, people often find it difficult to be specific when describing what business agility actually means.  Responses are usually of the kind: “being flexible”, “capitalising quickly on new opportunities”, etc. – which is fine, but how does an organisation actually do this?

The following diagram depicts six key components of an organisation that exhibits Business Agility:

• Adaptive Planning: Above all, the organisation needs to be able to plan and execute simultaneously.  Sequential planning leads to a very rigid implementation approach, whereas adaptive planning allows (indeed, encourages) many course-corrections along the way.
• Focus on Time to Value: There is an almost obsessive focus on getting new products/services/features to market as soon as possible.  This enables a shorter feedback cycle and, equally importantly, an quicker timeframe to earn a return on the investment made.
• Decoupling: This is where a lot of businesses (particularly larger enterprises) find it very difficult to move quickly to exploit new opportunities.  The more each business process is intertwined (coupled) with others, the harder it is to implement change quickly.
• Low Latency: While this attribute could be consider an underlying theme, it is worth calling out as a specific component.  The quicker a decision can be acted upon, the sooner the business knows whether the decision was right and what else needs to be done to achieve the underlying goal.
• Economic Efficiency: A lazy, bureaucratic organisation will protect its turf at the cost of progress and innovation.  Lean operations that minimise waste have the added incentive of promoting new and innovative ways of doing things, and being able to implement them quickly.
• Rapid Adaptation: While similar to Adaptive Planning, this component really refers to the mindset of continual monitoring of, and adaptation to, changing market conditions.  It is the ultimate feedback mechanism that ensures the product/service offering is continually refined to best meet the needs/constraints of customers, suppliers and partners.

Focusing on how you can introduce/expand the above disciplines in your organisation will bring real meaning to the term Business Agility.  As a result, the business will be better placed to exploit new business opportunities in today’s rapidly-changing competitive marketplace.

© Eric Jansen 2012. All rights reserved.

From my work in applying agile principles to business change programs, I’ve come to the conclusion that there are two main drivers of success in project implementation:

• Impact; and
• Time to Value

Not going to happen: If a project is going to take a long time to deliver, for little benefit, don’t even start it.  It may be tempting to do so if the capital requirements are (seemingly) small, but in my experience these projects either never finish, or invariably fail to deliver even the minimal benefits articulated in the business case that supported them.

Filler: This is a project that can be completed quickly, but does not have a great impact on the performance of the organisation.  Consider these as tactical projects that can be initiated at short notice (to make productive use of slack in organisational capacity).

Fundamental Shift: These are often mandatory, or ante projects (i.e. projects that you need to do to stay at the table/remain competitive) or core changes to the organisation’s direction and/or purpose.  While by their very nature these projects often must be done, one must resist the temptation to only do these long, enduring projects at the expense of harvesting Gold.

Gold: these are the projects that bring money to the bottom line quickly, and should therefore be prioritised over all others.  Whether it be an opportunity to quickly exploit a new market opportunity, make a considerable saving on an ongoing expense line, or significantly differentiate from the competition on customer experience, these projects are the ones that truly make a difference.

© Eric Jansen 2011. All rights reserved.

The political discourse in both the USA and Australia would suggest that populism is at an all-time high (at a tipping point, perhaps?).  Both sides of politics in each country seem to be driven by short-term poll results and (in the US in particular) a deep-seated fear of taking a stand on anything that might be controversial.

To take Australia as an example, despite the views that some might have held about Paul Keating or John Howard, one would be hard-pressed to make a case that, by and large, they didn’t stand by their convictions.  They also made some hard (and sometimes unpopular) decisions while in the hot-seat.

But the current Australian political landscape is in danger of slipping into the poll-driven mentality of American politics – much vitriol, but little substance.  This approach has the potential to foment complacency and a ‘head-in-the-sand’ mentality that will cost us dearly in the future.

Authentic leaders are very clear and passionate about their core beliefs and values.  The constructive debate that arises between people who hold deeply-held opposing views usually delivers much better outcomes than avoidance by both sides of confronting the difficult issues.

But what about the corporate domain?  Are we seeing the same pattern evolving in corporate stewardship, or is authentic leadership becoming more valued (and therefore more prevalent) in the modern-day organisation?

I’d be interested to hear your views and recent experience.

© Eric Jansen 2011. All rights reserved.

In my opinion, being open to failure is more about what we value (openness, transparency, collaboration and outcomes over process) than whether something is done ‘right’ or ‘wrong’.

To quote from the Prime Directive (see http://www.retrospectives.com/pages/retroPrimeDirective.html): “… we understand and truly believe that everyone did the best job they could…”

If this is truly our belief, and people are indeed doing the best they can with the information and skills that they have, the notion of failure moves from being an end-state to a step in the journey (whether the journey of ‘getting something done’, or the personal journey of growth / skills development ‘ etc.).

Failing fast to me also means learning quickly. If we try something to prove a hypothesis and it doesn’t work, this is the scientific method in action – we should celebrate that! To quote Albert Einstein: ‘You never fail until you stop trying.’

There is also another quote attributable to Einstein which is appropriate here: “Try not to become a man of success, but rather try to become a man of value.” The goal is to create value (for the organisation), not to be a successful person (a by-product of that endeavour).

Being open about failure allows us to focus on doing the right thing (and getting the right outcome), rather than focusing on trying to do things ‘right’.

© Eric Jansen 2011. All rights reserved.

John is a leader in Systems Thinking for Services Organisations.  Under John’s leadership, Vanguard has developed a methodology (known as the ‘Vanguard Method’) that adapts the teachings of W. Edwards Demings and Taiichi Ohno for the service industry. The wisdom of Demings and Ohno has had great positive impact on the manufacturing industry over the past 40-50 years, and Vanguard have been able to emulate this success with many service organisations over the past 25 years.

In our discussions last week, we hit upon a topic that causes much frustration amongst IT professionals these days: as a profession, we have made great strides over the past 10 years in bringing quality software into production in a much shorter timeframe and with significantly less resources.  Agile principles, in particular, have helped organisations to get a much better return on their IT investment (in comparison to using a waterfall approach to software development).

Despite these gains, there is much frustration in the IT community regarding true Business Value.  John made what I felt was a pertinent comment: “Agile is doing the wrong thing faster”.  While I would argue that the iterative process that Agile engenders actually surfaces the wrong things faster (and therefore permits us to change track to building the right things instead), I agree with John that we need to be starting from a point that is much closer to perfect that we currently do.

Under the Vanguard Method, we are called upon to define the purpose of the system from the customer’s point of view, and then design the system against customer demand.  While these concepts are plainly common sense, it is remarkable how often we are asked to build applications that clearly do not meet these criteria.

In particular, there are two key areas that contribute to the failure of IT systems to deliver the gains that they are theoretically capable of producing:

• Ignoring (and even automating) failure demand.  John defines failure demand as “demand caused by a failure to do something or do something right for the customer”.  A good example can be found with call centres, where “cost to serve” and “time to serve” are often (in fact, almost pervasively) key performance indicators.  These are false metrics, as unless the customer need has been met* during the call, the call actually failed to deliver value.  Under a scenario where the customer needs to call 5 times before the problem is solved (e.g. missed appointments, didn’t fix the problem first time, etc.), there are clearly 4 calls that represent failure demand in that scenario.
• Sub-optimising end-to-end value delivery, by independently optimising steps in the process.  This is a conundrum we encounter consistently in software development.  For instance, we may optimise the way payments are handled for an online transaction, but at the cost of asking the buyer to once-again (possibly for the third time!) enter their personal details, etc. – even for existing customers.

There were some great speakers:

• Senator Stephen Conroy, Federal Minister for Broadband, Communications and the Digital Economy

• Mike Quigley, CEO, NBN Co

• David Thodey, CEO, Telstra

• Hiroki Kuriyama, Head of Corporate Strategy, NTT Japan

• Datuk Badlisham Ghazali, CEO, Multimedia Development Corporation, Malaysia

• Dr Tim Williams, Director of Consultancy, Publicani, UK

Among some of the more memorable quotes:

David Thodey: “The Digital Economy is the Economy and the Economy is Global.”

Tim Williams: “The NBN should be considered a de facto Sovereign Wealth Fund for Australia”

Mike Quigley: “The success [of the NBN] will depend on applications – the NBN is [merely] an enabling platform”

Hiroki Kuriyama also gave an excellent presentation on what NTT (together with other carriers and the Japanese government) have been able to achieve in Japan via their highly developed high-speed network.  This network includes 19m homes with FTTH (fibre to the home) and many are now also installing fibre in the home (FITH)!

Most interesting talk was Tim William’s was an overview of the Connecting Communities report, which was commissioned by Huawei.

Two quotes from the report:

‘The full value of broadband includes outcomes around an educated citizenship, an informed democracy, cultural understanding, community and inclusion, social capital, resilience and trust.’

UK Broadband Stakeholders Group

‘Communities and citizens that lack high speed broadband access are at a deficit in comparison to their peers’

London School of Economics

The things Tim talked about really resonated with me: improved access for the disadvantaged, informed democracy, improved prospects for remote/isolated communities.  I would certainly recommend downloading and reading the report.

His annual budgets were always submitted early, his work and that of his team was always planned well in advance and there was rarely a moment of downtime in his business unit.  Indeed, to the untrained eye, Jeremy’s operation was a great example of how a well-oiled machine should operate.

Except for one minor problem: Jeremy’s business unit was consistently an underperformer.

It wasn’t that his unit ever lost money – they always did ‘OK’.  And by industry comparisons, the unit also did ‘well enough’ against peers, but not once did Jeremy’s business unit excel and hit the Top Ten in its industry, nor was it ever one of the top-performing business units in his own company.

And yet in Jeremy’s mind, he was doing an excellent job:

• he always hit his targets (almost always within a few percent) and his budgeting was impeccable;
• his team always gave him good feedback in his performance review (although never glowing – but that was just what one should expect from subordinates, right?)
• the industry he worked in was very competitive – anyone who kept making some money year-after-year must be doing the right thing.

Jeremy felt very confident in his abilities and his overall performance.  Until, that is, he was suddenly fired from his job on grounds of poor performance.

Jeremy was stunned!  How could this happen?  I’ve been doing a great job – there must be some mistake!

After a few days of wondering what could possibly have gone wrong, Jeremy thought back to the conversation he had with his manager the day he was let go.  He had been in such a state of shock that day – even though he had been listening, he didn’t really hear what his boss had said to him.

He then remembered there were three main ‘contributing factors’, his boss had said, that had led to the decision to let him go:

“You continually focus on sticking to the plan, rather than doing what’s right”

Jeremy thought about this for a while and at first felt quite confused.

“Isn’t sticking to a plan just what a good manager should do?  Predictability in results, right?”

Generally speaking, this was true, but unfortunately for Jeremy, his results were predictably and consistently below average.  It was Jeremy’s fear of taking the road less travelled, of taking some risk in an effort to get a better result, that left his business unit as the perennial underachiever.

In Jeremy’s world, the planning was everything.  And while Jeremy’s budgets and plans were certainly detailed and extremely well-thought out, that’s where Jeremy thought the ‘hard’ work ended.  After that, it was simply a matter of keeping things on track, right?

Unfortunately, the reality was just the opposite.  The industry Jeremy worked in was highly competitive.  And even though it was a commodity industry, demand and prices often fluctuated wildly throughout the year.

So when demand was low and prices were down, Jeremy’s unit just kept pumping out more and more inventory, until the warehouses were full.

And when demand was high and prices went through the roof, Jeremy’s unit worked to their standard 40 hour week, leaving the competitors to soak up all the ‘cream’ that appeared maybe once or twice a year at most.

So in the end, even though Jeremy’s team produced about the same amount of product as his competitors per person, the cost of inventory when business was slow, and the lost profits when business was booming, meant Jeremy’s unit was always destined to be a laggard.

“You put too much dependence on the numbers”

Jeremy was indeed a spreadsheet czar.  He could pivot-table and scenario-plan with the best of them.  And his Monte Carlo simulations were in some ways a work of art.

But this was where the root of the problem really laid.

What Jeremy failed to realize was that while numbers never lie, they are always only as good as the assumptions and data upon which the underlying analyses are based.

And Jeremy made a huge mistake in never questioning his assumptions, and hardly ever changing his scenarios.  After all, they had worked in the past and had produced ‘predictable results’ year-after-year.  It would be madness to mess with such reliable performance, wouldn’t it?

But, unfortunately, the predictable results were just that – predictably inadequate.

Now, you might ask why Jeremy was never challenged about these deficiencies by those he worked with.  Surely others must have challenged his assumptions and some of his decisions?

The answer was in the third contributing factor:

“You seem unable to take on the advice and counsel of those around you”

Jeremy had three bosses during his four years managing the business unit.

All three of them had shared more-or-less the same feedback about sub-optimal performance and lost opportunity.

Early on, his subordinates had also been almost relentless in their remonstrations about how they could do better.

And while Jeremy didn’t ignore any of them, he always had reasons why they shouldn’t deviate from the course he had set:

• “The market could fall sharply tomorrow – where would we be then?”
• “We’ll always have supplies ready for our customers – that’s important, you know!”
• “I’ve been doing this for all my life – I know this better than any of you, trust me…”

And so on…

But in reality, Jeremy was simply too scared to take a chance, to see if they could indeed do better.

Luckily for Jeremy, his first two bosses had been fairly sanguine about the situation – after all, the business unit was doing ‘OK’ and they has more important issues to deal with.

But Jeremy’s luck ran out with his third boss.

Knowing that the business unit could do far better, this boss set objectives for Jeremy that he knew the business could achieve, but Jeremy never changed course to meet them.  Months of coaching and guidance came to nothing, as Jeremy was steadfast in his convictions that the business was being run as best as it could – after all, his spreadsheets confirmed this in black-and-white!

But as it turned out, Jeremy was wrong in his convictions.

His replacement, Mia, doubled the profits of the unit in her first year in the job, and won an industry award the year after.

Jeremy was blind-sighted by a number of factors, including an overconfidence in spreadsheets and planning, and an unwillingness to learn from team members, peers, mentors, and the market.

So, what did Mia do differently?

She recognised that businesses, and the environment in which they operate, are always changing.  Making a plan one year, and sticking to it feverishly the next, is, at best, an exercise in futility and, at worst, a recipe for disaster.

Mia used three key principles to guide her in her decision-making each day:

• While planning is important, the planning process is more important than the plan.  Once the plan is done, don’t think of it as a blueprint, but rather a rough sketch of the route that will be embarked upon; as more information becomes available, keep refining the plan and make course-corrections along the way.  The environment is always changing.
• The certainty provided by numbers is as dangerous as it is seductive.  Budgets, spreadsheets, even ‘official’ financial statements, are only ever as good as their underlying data and assumptions.  Always question numerical analyses and never confuse accuracy (i.e. what the numbers say) with actuality (i.e. what really is happening).
• Consistently seek out new information and ideas from the market, your competitors and your colleagues. While business leaders and professionals have, by definition, highly-developed skills and real depth of experience, there is always more to learn.  The adaptive organisation depends on the adaptive executive.

Each brought a new way of doing things – sometimes evolutionary (e.g. Java), sometimes revolutionary (e.g. Test-Driven Development). But irrespective of the type of innovation, I’ve noticed a common theme that distinguishes organizations that have successfully adopted a new approach from those who haven’t – a strong commitment to change and perseverance despite the obstacles.

As an example, the company I currently work for is often sought after by prospective clients to help with the adoption of Agile practices in their organization. As strong advocates of this approach to software development, we are always eager to help organizations on their journey down this path.

But this is where the story starts to get interesting…

As with any significant change program, helping an organization transition from a waterfall approach to software development to one that employs an Agile mindset is far more involved than many would like to accept. Most organizations that I have worked with have needed a good two years+ to really internalize the philosophy underpinning an Agile approach into their day-to-day routines. And even then, they would fully acknowledge that they still had a long way to go.

Unfortunately, these success stories are outnumbered by the number of organizations who sought a short-cut approach and grossly under-estimated the effort required to bring about this substantial change. Without fail (at least to my better knowledge), these organizations were ultimately unsuccessful.

But surely, they say, how hard can it be? I read the book, went on the course – I get it!!!

And sure, the principles and philosophy underpinning Agile aren’t that complex (by definition!). But the real challenge is that of managing change in the organization. This is never a simple undertaking, and is certainly not in the already complex field of application software development. Not only is there the internal change in the team (roles, skills, responsibility and even personnel (those on the bus, not on the bus)) – external stakeholders are significantly impacted as well.

For example:

• Agile teams can deploy software as frequently as every week. Typical waterfall-centric organizations deploy software every quarter.
• Agile teams build to test, and then test throughout the development cycle. Testers sit side-by-side with developers, not ‘over the wall’ waiting for the ‘completed’ software
• Subject Matter Experts (SMEs), and even representative users, are often part of the team throughout the development – not just at the beginning (for design) and again at the end (for testing).

These and many other significant changes require that the organization take an ‘all-in’ approach. The ‘softly, softly’ approach unfortunately is doomed from the start, as the institutional inertia, even in small organizations, is usually too hard to shift without a major focus on the change itself. To quote an oft-used phrase by a colleague of mine “two Agile coaches for a couple of months ain’t gonna cut it”.

The organizations that I have seen successfully adopt an Agile approach to software development have been both brave and persistent:

• Brave enough to make a statement that ‘we are committing to this approach as an organization’ and then putting the necessary resources behind it
• Persistent enough to see the process through until the rewards began to appear (riding through the inevitable challenges and failures that occur during the learning and adoption process)

Fortune indeed favored these companies and they are benefitting from their decisions handsomely. One company that I have been associated with releases software into production every month and is able to launch new financial products on its customer-facing website every 4-8 weeks (compared with 6-9 months for most of their competitors).

In the end, the choice of approach is outweighed by the commitment placed behind that choice. The short-cut approach has little chance of success – but with adequate resource commitment and strong leadership, the results can be spectacular.

“Would your organisation be prepared to participate in eNegotiations as part of this procurement process?”

For those not familiar with eNegotiations, a good overview can be found at http://www.tradeinterchange.com.au/leftnav_educational/reverse_auctions.htm. In essence, eNegotiations are online ‘reverse auctions’, where the purchaser seeks the lowest price for a particular commodity from the vendors participating in the auction, typically during a one-hour timeframe. During that hour, the bidders usually see the ‘current winning bid’ and have the option of become the new ‘winning bidder’ by lower their previous best price.

This process may seem to create significant economic value for the purchaser, until one asks the questions “what am I actually buying?” and “what will I actually get from the winning supplier(s)?”

One of the core tenets of reverse auctions is that the goods and services being purchased are for all intents and purposes ‘commodities’ (i.e. a physical substance … which is interchangeable with another product of the same type ). Sure, there is usually a minimum qualitative bar that organisations participating in the auction must exceed, but after that, it’s all price, price, price.

Which begs the question: is one Project Manager/ Enterprise Architect/ [insert skill set] really interchangeable with the next?

To illustrate my concern with this question, let’s just change the context to another provider of professional services – the legal profession.

Suppose you have just been wrongly accused of a traffic violation and you need a lawyer. Do you look for the cheapest lawyer you can find, or do you try to find one with a good track record of getting the charge dismissed? Sure, you don’t want to pay too much for the advice, but what is the main driver in your thought process – getting a cheap deal or getting the right outcome? I would suggest the latter is usually the main consideration in most people’s minds.

Which brings me back to the financial services organisation’s intention to use reverse auctions to get the cheapest price for specialist, professional services. As professionals (and the services they provide) do not even come close to the definition of commodities, the likely outcome is that the lowest-cost provider will prevail in the auction process, but the ‘winner’s curse’ will be that they will most likely have bought the professionals with the poorest past performance.

So given that financial services organisations usually demonstrate considerable acumen in business dealings, why would they seriously consider treating IT professionals as commodities in the procurement process?

Unfortunately, the answer is probably an indictment of the IT industry in general. With IT projects continuing to suffer from late deliveries, bloated software, project cancellations and budget blow-outs, executive management is increasingly viewing IT spend as a ‘cost of doing business’, rather than a means of creating competitive advantage. This being the case, anything that can reduce this overall cost will, by inference, increase bottom line returns.

The IT industry needs to take on the challenge of changing this mindset in the executive management community. Otherwise, the software profession will become increasingly marginalised, which will bring real costs to the wider community, in particular the potential loss of the productivity dividend that has underpinned much of the economic growth the developed world has experienced in the past few decades.

The next article in this series will present some thoughts on how the IT industry can improve it’s reputation in the executive boardroom.