How CIOs and CFOs Can Transition to New Finance and Budgeting Processes That Support Innovation

Flexible delivery of emerging technologies to drive business outcomes is fast becoming today’s competitive battleground.

Deloitte research found that expect to implement Agile software development, DevOps, or a similar flexible IT delivery model to increase IT responsiveness and help spur broader innovation ambitions.

But there is an obstacle currently slowing these efforts, and it is formidable: the sourcing and distribution of funds.

IT’s operations and development processes are becoming nimbler and product-focused while the finance function continues to budget, fund, and report the same way it has for decades. The result: tension between IT’s needs and finance’s procedures. If left unaddressed, this issue could impair the CIO’s innovation agenda and undermine an organization’s strategic goals.

Nowhere is this tension felt more acutely than in funding strategic innovation and transformation agendas, which currently account for a small percentage of IT’s overall budget. The average IT department spends 56 percent of its technology budget on maintaining business operations and only 18 percent on building new business, according to the Deloitte research.

This is especially true for development initiatives that emphasize agility and speed. Finance processes are typically still tied to a project mentality, where the fallacy of predicting the future for unique product development is locked into a project plan with associated fixed project funding. Instead an “agile” approach—referring to being nimble or flexible rather than to Agile software development methodology—is capacity funded with a focus on maximizing outcomes.

Agile initiatives typically feature cross-functional teams working in iterative sprints. In many companies, this clashes with the finance organization’s traditional funding processes, which are optimized for functionally compartmentalized teams.

There are multiple approaches that can help maintain the balance between fiscal control and flexibility:

  • Change within finance. Finance should explore opportunities to tailor budgeting, funding, and reporting processes to better meet the business’s evolving needs for its portfolio of technology investments. This will likely include developing new methods for investing across time horizons, accurately measuring the somewhat unpredictable long-term value that products built with agility can generate, and accounting for value in ways that meet accounting and reporting standards.
  • Change within IT. The future of the IT organization includes structural changes such as organizing resources around products and outcomes, creating a clear road map for foundational tech investments, and evolving traditional roles in procurement and vendor management.
  • Creative funding. Creative funding sources can amplify and accelerate change. CIOs and CFOs can explore opportunities for funding innovation such as co-investing within and across their industry, ecosystem subsidies, carveout leasebacks, and other models.

Putting Agile Strategy to Work

Size and history don’t make an organization safe from rapidly evolving competitive pressure. For instance, banking giant Barclays recognized that nimble fintech startups, business model-changing emerging technologies, new consumer data protection regulations, and other industry challenges demanded a new approach.

Barclays launched an enterprise wide agile adoption initiative in 2015. Since then, more than 800 teams have adopted agile principles, values, and practices.

To better support iterative releases, continually changing requirements, cross-functional collaboration, and other hallmarks of Agile software development, Barclays retooled many planning, budgeting, and finance processes. The agile transformation changed the way business, finance, and technology functions interact, says Brijesh Ammanath, global CIO for Trade and Working Capital (T&WC).

For example, Ammanath’s technology team was challenged to reconcile iterative delivery with its traditional budgeting exercise, typically conducted 18 months in advance of project delivery. Instead, the team established a rolling wave planning cycle. Technology and business functions meet quarterly to discuss and prioritize the product outcome road map and feature deliveries; technical debt also goes in the queue so that it doesn’t bog down development and testing.

Other business priorities may bubble up depending on competitive pressures, regulatory changes, the emergence of new technologies, evolving operational goals, and other market trends and performance indicators.

Outcomes that aren’t driving value for the business are de-emphasized, with funding rerouted to key revenue drivers. Conversely, if a feature is increasing revenue, teams could decide to enhance it and align more of the capacity-based funding to it. Business and technology leaders are equally empowered to prioritize projects.

Finance and technology teams then meet monthly to review costs and outcomes. Instead of providing imprecise long-horizon estimates, the technology team maps investments to key business revenue drivers. The move to agile allowed T&WC to increase production delivery frequency twelve-fold, from quarterly to weekly, allowing the technology team to demonstrate tangible outcomes even if revenue is not immediately projected.

“Agile has changed everything from the way we’re structured and how we hire people to the tools we use for collaboration,” Ammanath says. “It’s a continuous improvement journey, so the transformation will be ongoing. The whole purpose is to be better this week than we were last month.”

Moving to New Models

Transitioning fully to new finance and budgeting processes that support agile innovation won’t happen quickly. For at least the near future, leaders can run both old and new funding approaches in parallel as they further refine their processes and establish governance guardrails. But ultimately, the journey from time-based projects to long-lived products supported by a portfolio view of innovation investments, can be worth it.