Agile Transformation and the importance of driving changes to your financial model.
Why finance is so important during an Agile Transformation is rooted in why companies choose to transform. For some companies, the drive to radically change how they operate comes from their inferior products and services adoption or a need to survive in the digital age. For others, either it's the high cost of their existing services, or it's what their competition is doing.
"One of the most critical aspects of transformation, financial model change, is frequently overlooked."
How does change start?
Change frequently starts top-down, where an executive decides to accelerate improvements by focusing on revitalizing an existing operating model that impacts an entire enterprise across all divisions. Transformation can also start bottom-up, as an experiment or with an experienced change agent familiar with producing better value.
What happens if changes start gaining positive results?
To capitalize on improvements quickly, leadership wants to scale it across business units and, if all goes well, potentially scale it to other organizations. The scaling part is where problems become more visible, whether transformation started top-down or bottom-up. At a scale, we rarely see various business units and divisions working coherently, together, and in concert supporting each other to create an amazing customer experience. Excellent customer experience is derived by understanding and improving the customer journey.
In reality, most divisions remain in their vertical silos trying to adopt new ways of working individually. Such behavior's root cause can be attributed to a lack of common goals, objectives, OKRs, all collectively called incentives at the enterprise (top-level). However, there are other patterns at play, i.e., internal politics, egos, etc.
Where do incentives come from?
In most places, incentives come from funding models. As we commonly say, to find what drives behavior, follow the money. The traditional expectation is that funding is provided based on a business units' performance related to sales.
There are a few dimensions to look at:
- Customer Journey: Unlike in the past, today, there are multiple ways customers interact with your company, which is what we call customer journeys.
- Enabling Groups (IT, operations, human resources, marketing, etc.): Enabling organizations to charge business units a flat fee regardless of their performance
By looking at the first dimension, the intuitive resolution would be to fund customer journeys, or in some cases, products. In the second dimension, we should consider tracking the Total Cost of Ownership (TCO).
So, what role does the TCO play? Potentially, it describes and captures data of what it takes to build, maintain, support, and sell a product or a service that includes enabling teams. Most companies use their existing financial frameworks even after transitioning to a new way of working. Enabling groups' cost to chargeback to divisions remains the same (a flat fee), peanut butter spread, regardless of their efficiencies.
Now, let us consider two options:
Option 1: Suppose the financial model remains the same during transformation, passing flat fees back to business units based on the number of resources working in IT, human resources, marketing, etc. What incentives do business units and enabling organizations have to improve and change?
Option one is easy because it does not require significant change. Thus one of the most critical aspects of transformation, financial model change, is frequently overlooked and not just initially but for many years. This pattern costs companies millions of dollars due to lack of transparency in their financials, delays in necessary investments around technology, innovation, developing employees, etc.
Option 2: The financial model changes to reflect customer journeys or products and the TCO.
Option two allows the alignment of financial models and incentives with new ways of working that improve and accelerate transformation, culture, and behavior. However, there are some things to consider:
- Carve out products and services out of convoluted, monolithic, intertwined processes and systems.
- Identify the current cost of running each product and service.
- Identify and build cross-functional full-stack teams dedicated to building, maintaining, and innovating this product or service indefinitely.
- Identify business and, if needed, a technical owner responsible for P&L (Profit and Loss).
- Estimate and fund work at the Epic, Feature, team level, not projects and individual resources.
- With each iterative delivery, track adoption and revenue associated with it and rework cost, i.e., bugs or technical debt. Charges may include marketing efforts, hiring efforts, etc.
- Leaders need to start thinking of each product or service as their business, continuously improving ROI. To do that, leveraging a quarterly rolling budget is preferred.
For those of you who are bold and adventurous with helping your organization succeed, including business as usual work, in your product would bring more accuracy and empiricism to the TCO, enabling you to act based on evidence.
As products and services continuously evolve and change, so does the transformation. Leadership needs to pivot their financial thinking from projects to products and services. The concept of a rolling quarterly funding model will expose whether incremental delivery gains expected usage and thus revenue. This approach incentivizes future investments based on actual data supporting never-ending progress.
Are you interested in a more in-depth consultation? Contact Apex Systems and ask for Natalie Vinitsky, Agile Coach.