Sunday, August 5, 2018

What will it take to get Agile-friendly finance models in corporations?

My friend and coaching colleague Khali Young posed this question to me:
"What are the pain points enterprise finance people have that would motivate them to move towards venture capital style funding models?"
I'm not a finance guy, nor do I play one on TV, but I do have opinions, and I have worked for a venture capital funded startup, plus several traditional corporations.

In the abstract, my sense is that this is a typical "why don't people change when things are obviously bad" question. And the answer is usually some combination of: they don't feel the pain (although others do); they feel it, but don't have the tools to address it, or there's some other factor inhibiting change.

As always, the details matter so let's break it down. First, I'll describe the basic difference in the funding models; next I'll explain why Khali's question even makes sense; and finally I'll hazard an answer.

Startup funding vs Corporate funding

Many funded startups think in terms of "runway". Like a plane trying to take-off before it runs out of runway, startups try to achieve so-called product-market fit — i.e. a scalable business model — before their funding runs out. Many will do this in lean-startup fashion by running lots of rapid experiments as they refine both their product (or service), target market, and method of reaching that market. Now, it may be that there are extra injections of capital along the way, but these additional funding rounds will increasingly dilute the investments of the founders and early investors, unless the valuation grows sufficiently rapidly.

My experience of working at a startup, especially in a leadership position, was influenced by the very real fear that the money would run out, and this drove us to keep trying new things.

By contrast, in traditional corporations funding typically revolves around an annual planning process in which the budget for various departments (or whatever) is allocated a year in advance, plus additional funding for major projects.

The corporate landscape has changed


This corporate funding model seems to have worked acceptably well in the past, but is now breaking down as complexity and uncertainty increase. No longer can organisations just continue to grind out profits based on the long-ago discovered business model, but they must continue to innovate improve, lest they go they be disrupted into oblivion. In other words they need to get back some of the quality of innovation that startups have in spades while continuing to deliver value.

Practically speaking, the seemingly artificial requirement to forecast a year or more on advance acts as a brake on organisational responsiveness. Agile ways of working, by contrast, emphasise just-in-time decision-making, enabling rapid response to external threats and opportunities, and to internally generated insights.

Agilists would typically prefer a funding model that supported the new work structures that enable agility, such as bringing smallish chunks of work to stable, ideally high-performing teams rather than assembling teams to tackle large, annual funding sized programs of work. With stable teams (and teams of teams in place) some kind of portfolio planning can dynamically assign the highest value work to the teams without having to justify it a year or more in advance. This enables greater responsiveness in suitably skilled up and structured organisations.

And in turn, this inversion of funding teams rather than work leads to a desire for compatible forms of funding: for example block funding for teams rather than funding for large programs of work. However, currently most organisations are stuck with the older forms of funding leading to unnecessary waste in — for example — mapping the new work to the older funding structures, and needless alarm when the adaptive work systems create output that diverges from out-of-date plans.

What will it take?

Now, returning to Khali's question, I suspect that the issue is that the pains are either not being felt by the key decision-makers in finance, or — if they are — that they feel unequipped to change.

To recap, the key pain points are:
  1. Insufficiently rapid response to externally changing conditions
  2. Waste generated by a mismatch between responsive (Agile) ways of working and older style funding mechanisms
In a coaching engagement with finance people using seemingly outdated methods, after first exploring their perspectives and pains, I would also investigate whether they were aware of the above two pains elsewhere in the organisation, and see how they respond to that information.

If they are aware of  (or once they are made aware of!) the issues, I would enquire as to whether they feel equipped and empowered to help. Are they aware of alternative methods such as Beyond Budgeting, Conditional Budgeting, and Throughput Accounting that provide a modern body of knowledge from which to draw?

As with many examples of seeming inertia there may be a lack of awareness: if you're not feeling the pain, why change?! Or if there is awareness, there may be a lack of sufficient knowledge, skill, or empowerment to remediate the problem. And there also may be additional countervailing forces at work — it's always worth checking, and often surprising and humbling to find out what else is going on in any complex organisation!

2 comments:

  1. Thanks Dan for this. I’m appreciating how you have summarised the startup vs corporate funding models and pointed out issues with the corporate funding model. Reading this, I reflect more generally on the pain points I imagine finance people to have. Clearly the overall concern of finance is how money is being managed - how it is (i) being allocated and (ii) tracked; that (iii) business cases make sense and (iv) are actually returning the results that were forecast.

    * For (i), inevitably there isn’t enough money to go around (except in rare circumstances) so the politics of who gets what money seems challenging to manage. Particularly when the cost cutting part of the cycle emerges. From what I’ve seen of the finance people I’ve interacted with, there can be frustrated heavy handed enforcing of decisions associated with who gets what money rather than collaborative negotiation of conflict.
    * For (ii), money seems to be tracked through cost centre buckets that require a lot of management by PMs and justification of spending. Managing budgets is obviously super important. People need to be kept to account so that money is not fruitlessly spent. This can easily turn into policing that has people feel like they are having to answer to dad though. I think it would actually be super helpful to finance people to be able to trust that people are going to responsibly manage their money. What’s then important is evidence that people are being responsible rather than policing the specifics for people
    * For (iii), business casing I think can be a bit of a dark art. How do you make reasonable assumptions that reality is going to do what we want. I see a lot of people having biases in their business cases because they want the results they are after. Seeking disconfirming evidence is so so important! This to me is a major piece that Agile approaches bring, they often not well - the more the business case can be treated as a hypothesis to be tested and then pivoted on as we learn, the more likely we’ll get results we want. This to me is the major problem with corporate financing models - that there is very little room to revise the business case based on learning.
    * The above point is strongly tied to (iv) in that if there is no way to be measuring the validity of the business case then we have no idea if it achieved the results we expected. I see this as a major issue in corporates. Most people fudge numbers to make reality look like the assumptions generally because their incentives are tied to having achieved these results. I think it’s so important here to remember that correlation does not equal causation. I have sat in many a business team meeting with the team congratulating itself on it’s results (which is important for sure) but with no questioning of why tho results actually occurred - it could actually have been for all kinds of reasons separate to whatever feature or operational process has been implemented. Of course reality is complex with a lot of variables - it’s generally super hard to know what caused what. Any finance person worth their grain of salt I think should be asking for some sense of evidence that a team know’s why results have been achieved rather than just being happy that the results have been achieved.

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  2. Having spoken to a bunch of finance types, I think the actual pain point in finance teams is diferent.... It's a responsibiity/control mismatch. They are responsible for the budget but in reality have very little control over how its really spent... And we are asking them to give up what little sense of control that they have.

    Finance teams are essentially trying to control the uncontrollable. To do that they impose all the things we know and hate - annual budgeting cycles, business cases etc. They are all ways of trying to exert control over money.

    The models presented above (beyond budgeting etc) don't fix that fundamental problem. They actually ask the finance team to devolve more control to the operational teams. To a finance team struggling with control, they make the problem worse.

    Finance teams (like the rest of the organisation) are locked into a system that forces them to behave in a particular way. What needs to happen is a change in organisational remit for the finance teams. They need to shift from controlling finances for the organisation to providing financial advice and reporting to the organisation. That will require changes from the Ceo and board level.

    Cheers
    Dave

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