LPM Budgeting

19 Feb LPM Budgeting

In Lean Portfolio Management (LPM), budgeting is approached in a more flexible and dynamic manner compared to traditional budgeting practices. The goal is to align financial processes with the flow of value and enable faster feedback loops for investment decisions. Here’s an example of how budgeting can be done in LPM:

1. Lean Budgeting Principles: In LPM, lean budgeting is based on principles such as dynamic funding models, lean business cases, and decentralized decision-making. The focus is on funding initiatives based on their potential value and validated learning rather than fixed annual budgets.

2. Value Stream Budgeting: Instead of allocating budgets based on departmental or project-based silos, LPM emphasizes value stream budgeting. This involves allocating funds to value streams, which represent the sequence of activities that deliver value to the customer. For example, a software development value stream might have its own budget to fund initiatives that contribute to delivering software products.

3. Rolling Wave Planning: LPM encourages the use of rolling wave planning for budgeting. This means that budgets are re-evaluated and adjusted regularly based on the evolving understanding of market conditions, customer needs, and the performance of ongoing initiatives. For instance, budgets may be reviewed and adjusted on a quarterly basis to reflect changing priorities and opportunities.

4. Lean Business Cases: Instead of traditional business cases that require extensive upfront planning and detailed financial projections, LPM promotes lean business cases that focus on validating assumptions and learning quickly. Lean business cases are based on hypotheses, experiments, and validated learning, enabling more iterative and adaptive budgeting decisions.

5. Decentralized Decision-Making: LPM encourages decentralized decision-making when it comes to budget allocation. Rather than relying solely on top-down budgeting processes, LPM empowers teams and value stream stakeholders to make funding decisions based on their understanding of customer needs, market dynamics, and the potential impact of initiatives.

Example:

Let’s consider a fictional software development organization implementing Lean Portfolio Management. The organization has multiple value streams responsible for delivering different software products. Here’s how budgeting might be approached:

Value Stream A: This value stream is responsible for developing a new mobile app for a specific market segment.

– The budget for Value Stream A is allocated based on the potential value of the mobile app to the target market.

– Rolling wave planning is used to review and adjust the budget every quarter based on customer feedback and market insights.

– Lean business cases are created for each major feature or enhancement, focusing on validating assumptions through iterative development and customer feedback.

– Decentralized decision-making allows the value stream team to allocate funds to initiatives that show promise based on validated learning and market feedback.

Value Stream B: This value stream is focused on maintaining and improving an existing enterprise software product.

– The budget for Value Stream B is allocated based on the ongoing maintenance needs and strategic enhancements identified through customer feedback and market trends.

– Rolling wave planning enables the value stream to adjust the budget as new maintenance requirements emerge or strategic opportunities arise.

– Lean business cases are used to justify investments in specific maintenance activities or new features, with a focus on validating assumptions through incremental development.

– Decentralized decision-making allows the value stream team to prioritize and allocate funds to initiatives that align with customer needs and strategic objectives.

By approaching budgeting in this way, the organization can adapt more quickly to changing market conditions, customer needs, and emerging opportunities while ensuring that funds are allocated to initiatives with the highest potential value.