Your Budgets For Next Year Are Likely Now Complete, Now See How it's Ruining Your Value Delivery.

Everyone has to deal with budgeting.  Budgeting is simply the process of determining how to fund your expected needs in a project.  Budgeting is not a process with an extensively long history.  Much like most modern management it is a function of how organizations with tremendous growth planned spending. They determine how people behave in any given situation. Focusing leaders' minds on the stewardship of shareholders' funds and ensuring that managers worried about controlling costs were its original functions, and leaders and managers, by and large, behaved accordingly. But budgets have since been hijacked by a generation of financial engineers that have used them as remote control devices to "manage by the numbers." They have turned budgets into fixed performance contracts that force managers at all levels to commit to delivering specified financial outcomes, even though many of the variables underpinning those outcomes are beyond their control. This leads to undesirable and, in many cases, unethical behavior.

How has budgeting and the finance process stiffed innovation to the extent where over 90% of professionals look at budgets in negative terms.  Why is there not more outrage regarding how the process denies agility?  Lean and agile models work towards delivering value while adapting to changing business needs.  I believe there is nothing more threatening to an agile and lean process then the limitations set forth with a budgeting process.  When budgets are calculated to forecast something a year to six months out how can this possibly foster value creation? Budgets are a modern day contract where the budget contract is usually fixed for a period of twelve months. Its purpose is to commit a subordinate or team to achieving an agreed-upon outcome and then to enable a superior to control the results against that outcome (reserving the right to interfere and change the terms if necessary).


How have we arrived at such high levels of dissatisfaction with budgeting? There are three primary factors: (1) Budgeting is cumbersome and too expensive, (2) budgeting is out of kilter with the competitive environment and no longer meets the needs of either executives or operating managers, and (3) the extent of "gaming the numbers" has risen to unacceptable levels. Few senior executives seem to be aware of these problems. They see outcomes in terms of numbers rather than behaviors. In this context, budget contracts can act like drugs. They seduce executives into believing that they have control over their future financial outcomes. But, like most drugs, they have serious side effects. They lead both senior executives and operating managers into an annual performance trap from which it is difficult to escape.


In these turbulent times the budgeting process struggled to cope. Goals and measures were internally focused. Intellectual capital was outside the orbit of the budgetary control system. Innovation was stifled by rigid adherence to fixed plans and resource allocations agreed to twelve to eighteen months earlier. Costs were fiercely protected by departmental managers who saw them as budget entitlements rather than scarce resources. The internal focus on maximizing volume collided with the external focus on satisfying customers' needs. And far from being empowered to respond to strategic change, front-line people found that it was easier to do nothing than to try to get multiple signatures on a document authorizing a change in the plan.


The organizations I have worked with used to set targets on the basis of financial numbers that, more often than not, were negotiated between superiors and subordinates before the start of the year. These numbers were fixed for the year ahead and represented the key component of the annual fixed performance contract. All actions were then focused on meeting the numbers not on value delivery. However, whether this process maximized the profit potential  is doubtful given the desire for superiors to stretch ambition and the desire for budget holders to play safe.


What does the Lean Technology Transformation do to solve this?  Well it's not so simple but here are some ideas.  What holds your organization together is not a plan, but a commitment to a clear purpose and to a set of clearly articulated principles and values.  To create value intellectual capital needs to be set free from stifling bureaucracies, free from the restrictions of predetermined plans, free from the fear of failing to meet fixed targets, and free from the forced cross-company actions designed by central planners.  Agile leaders set targets based on high-level key performance indicators (KPIs) such as return-on-capital, free cash flows, or cost-to-income ratios. Goals are typically set at levels aimed at maximizing short- and medium-term profit potential at every level of the business. Managers are willing to accept (or propose) these stretch goals because their performance will not be evaluated and rewarded against them. They will subsequently be measured and rewarded using a range of relative indicators such as peer group performance, internal and external benchmarks, and prior years' results. "Baseline" goals set a lower reference level of expectations. Though goals are primarily financial at the highest level, they become more operational the nearer they are to the source of value delivery.

By making this transition The benefits are that the process of setting targets is fast (days rather than months) and because it is based on relative measures it will seldom need to be reset. Also, because the benchmarking bar is always being raised, it is more likely to maximize profit potential. Some project leaders figure they have saved 95 percent of the time that used to be spent on budgeting and forecasting. This time is more usefully spent on planning how to create more value for customers and shareholders as well as how to respond more effectively to change.

Changing to a more updated model fundamental matches the goals of a lean organization.  The impact on the behavior of front-line people must not be underestimated. It leads to what Harvard professor Chris Argyris calls "internal commitment." The hidden problem, according to Argyris, is that people have to deal with two types of commitment. First, there is external commitment, which, by and large, leads people to fulfill contractual obligations specified by others, and in which performance goals are top down. Second, there is internal commitment, which allows individuals to define their own plans and the tasks required to fulfill them, and which is participatory, comes from within the individual, and leads to people taking risks and accepting responsibility for their actions.This is the behavior that the relative improvement contract seeks to encourage. The rhetoric of leaders does not produce internal commitment any more than it leads to effective empowerment or personal responsibility. Such changes require a fundamental change in the process that determines the behavioral context.

Finally, what needs to happen in the firm is a decentralization which enables leaders in your high performance teams.  Below are six common principles which organizations who have made this break posses:

1. Built a governance framework based on clear principles and boundaries
2. Created a high-performance climate based on the visibility of relative success at every level
3. Provided front-line teams with the freedom to make decisions that are consistent with governance principles and strategic goals
4. Placed the responsibility for value creating decisions on teams
5. Focused teams on customer outcomes
6. Supported open and ethical information systems


The leaders in question have abandoned the notion that employees base their commitment on mission statements and detailed plans prepared by someone else. They have abandoned the command, compliance, and control approach that assumes that strategy formulation and execution take place in separate compartments. And they have abandoned the assumption that front-line managers cannot be trusted with the responsibility to think and act on the latest information in the best interests of the firm as a whole. They have built a relative improvement contract based on mutual trust, with clear responsibilities for high-level performance from front-line people. They have also built a community spirit that reflects the interdependence of the organization and that supports seamless solutions for customers. Above all, they have recognized that people respond more positively to clear values and principles than to nebulous mission statements and detailed plans.

Claim Code - QJ225G8B6PJC

Waste Is Everywhere and It Starts With You

Waste is certainly a catchphrase that is overused to the point where the word itself has become diminished as a way to define useless activities (catching up to "out of the box" and "at the end of the day").  James P. Womack has spent a great deal of energy simplifying how an organization can think about waste (As Lean practitioners know simplification is the true sign of a genius). Simply stated, the core idea is to maximize customer value while minimizing non-value added activity.  Waste can be defined as activities which the customer would not be willing to pay for. Simply, lean means creating more value for customers with fewer resources.

A lean organization understands customer value and focuses its key processes to continuously increase it. The ultimate goal is to provide perfect value to the customer through a perfect value creation process that has zero waste. The same goes for a Lean professional. 

To accomplish this, lean thinking changes the focus of management from optimizing separate technologies, assets, and vertical departments to optimizing the flow of products and services through entire value streams that flow horizontally across technologies, assets, and departments to customers.  Remember, this works horizontally not vertically.  Most organizations operating today are still structured in silos(vertical) which in themselves hemorrhage waste but in aggregate tremendously decrease customer value .  Lean initiatives that work up the vertical have their value but are much less effective than horizontal programs.  

Lean works not because it's a framework of best practices but because it it is a deep behavioral and cultural transformation that encourages everyone in the organization to think differently about the role of quality in the creation and delivery of value to the customer.  This thinking changes organizations fundamentally when they must think across the value stream (vertical).  Consider your organization.  If you're in marketing and you are responsible for the value of your product all the way through its cycle then you start to think more about change when its impact is measured from concept to cash.   When it fails (which it often does) it's because the cultural implications and focus were underestimated. 

I'm not interested in spending more time discussing Lean from a macro perspective because there are many smarter and better written books and blogs which accomplish that.  My point in this discussion is to bring about the idea that waste reduction can start with you. 

Look at every activity you perform in your job.  Think of an activity as a series of steps that take an input and turn it in to an output that is consumed by the next activity.  Ask yourself why you do it and is there a better way to do it?  Does it need to be done at all?  Once you find those activities which you feel can be improved and/or eliminated then do it.  Fix it now,  don't wait.  Once you fix it start measuring its impact.  After all if it's not helping it will be viewed as hurting and you will be forced to digress back to status quo. 

I'm often asked when suggesting this path.  Where do you start and how do you do it?  Over the next week I will be posting recommendations for how to start your own personal Lean initiative.  How you can socialize its value and how you can make it contagious in your organization.  Nothing here is new and nothing was invented by me.  It's already in hundreds of books and research papers but I've facilitated this process enough that I can share best practices which have personally worked for me in implementing a success Lean/Culture transformation.  

The steps I will walk your through are....

1. Current State Mind Mapping

2. Problem State Mind Mapping

3. Value Stream Mapping and Theory of Constraint Identification

4. Future State Mapping and Waste Elimination

5. Implement and Improve

Let the fun begin.  Please contact me if you have thoughts or ideas which you would like templates of my personal thoughts on. 

Business Value is the Key to IT Value Delivery

Alignment with business customers is an incredibly hot objective for technology strategists and one that is supported by powerful long-term market trends. A recent survey by Forrester Group of strategy professionals found that 91% of respondents say that increasing their business focus is a strategic priority for their organizations over the next three years — beating out other hot topics in the technology industry such as innovation, investment in social emerging technologies, mergers and acquisitions (M&A) activity, and geographic expansion. Despite the strong interest, however,  I find far too many technology companies see this objective as primarily a responsibility to be handled by marketing organizations. To prepare for the long- term evolution of the technology industry with the business, technology firms will need to take a much more robust approach — one that incorporates the needs of business customers into product development, strategy, marketing, and sales.




INCREASED BUSINESS FOCUS ALIGNS WITH IMPORTANT NEAR- AND LONG-TERM TRENDS
I often hear from technology companies that say that they want to improve the way they are aligning their technology products and services with the needs of business customers. These companies have realized that fundamental shifts are taking place within traditional IT departments: IT decision-makers are no longer the sole owners and drivers of technology purchasing decisions, and business leaders increasingly expect vendors to highlight the business issues that technology can solve. This interest is consistent with two key trends we see at Noetic Labs that will be critical to the success of strategists in 2010 and beyond:
The economic downturn has changed the way technology purchases are made.
In the past year, many tech companies have tried to become more business-focused as a way to counter the effects of the recession. With more stakeholders weighing in on technology purchasing decisions and longer purchasing processes existing, tech vendors are selling to business stakeholders as a way to cut through red tape and quickly close deals.
The technology industry is becoming embedded in the business process.
Increasing technology alignment with business needs is consistent with the long-term evolution of the IT industry. As technology becomes a more integral part of business process, IT organizations are under greater pressure than ever to keep pace with the challenges their business customers face. In the long term, this trend is shaping what technology vendors sell, who they sell it to, and how they sell it.
The problem for most technology vendors, however, is that when it comes to business focus, everyone talks about being good at it, but few are really executing. Although virtually all tell us that business focus is their priority, ask them what they are doing to execute on that priority, and responses vary significantly. Some vendors have adjusted their strategic plans and market outlooks drastically, others have just made adjustments to their marketing messages, and still others have difficulty explaining what their "business focus" means at all. For most part, it seems that the tech industry is still rooted in its heritage of serving IT customers. Noetic Labs has instilled in their service model a process to determine if a vendor actually is executing business focus.

ALIGNING WITH BUSINESS HAS BECOME A KEY PRIORITY FOR MANY
In previous Noetic Labs research, we have identified how several companies are investing in business-focused messaging strategies at the corporate level — but the marketing of individual product and service offerings lag behind corporate ambitions. This disconnect can be symbolic of serious gaps within organizations: When corporate leaders move faster than the sales and marketing professionals, customers may be left with mixed messages. Noetic Labs believes that technology vendors need to do more to incorporate their business focus at all levels of their organization.
MARKETING STRATEGIES ARE THE MAIN TOOLS TO FOCUS ON THE BUSINESS CUSTOMER
We found it concerning that the most top-rated tactics of focusing on the business customer are all generally related to marketing and sales, while the lower-rated tactics relate to products, services, and evaluation metrics. While this could reflect the marketing focus of many of our direct partners, it also highlights a trend we see at Noetic Labs: For many technology companies, interest in business focus is largely perceived as a marketing tactic, rather than an area for complete strategic alignment. In this regard, companies that differentiate themselves are the ones stressing the importance of business alignment in their product development, strategy, marketing, and sales.
It's also noteworthy that use of metrics often ranks relatively low on this list of tactics. This highlights the fairly common difficulties that companies have when seeking to provide something as vague as business value, without having a fully developed understanding of what it means. Although we often hear from vendors that say that providing business value to their customers is best highlighted in the cost savings they provide, reduction of IT costs is a metric that is rooted in an IT-centric view of the world. Business leaders care about costs, but they also care about diverse factors such as improved customer satisfaction, levels of innovation, and time-to-market. This highlights an opportunity for vendors to get closer to their customers by identifying their success metrics and working with them to achieve those metrics.


LINE-OF-BUSINESS AND C-LEVEL EXECUTIVES ARE THE TARGET AUDIENCE
When we asked our customers about the business roles they are targeting, we found that line-of- business managers are being targeted as the primary business customer. Next in line were C- level executives such as chief executive officers (CEOs) and chief financial officers (CFOs), followed by chief marketing officers (CMOs) and individual contributors.
It's not surprising that line-of-business managers are the most popular target. They are much easier to access than C-level professionals and often have the budget authority to push technology decisions. Just as importantly, these are the stakeholders with the most immediate business technology needs. For vendors, this data point highlights a major opportunity: Business professionals are increasingly aware of the strategic value of technology, but their IT organizations are not meeting their needs. Vendors that want to improve their strategic relationship with their customers need to do more to identify and meet these needs, even if it means making fundamental changes in traditional marketing and sales channels.
The focus on CFOs is also interesting given the increasing alignment between IT and finance. As IT organizations face greater operational scrutiny, it's not uncommon to see CFOs making

Unfortunately, many technology companies don't know what they are up against when they say that they are going to target business customers with their technology solutions. Companies that have traditionally sold to the IT organization will find it extremely difficult to make the jump into selling to the business audience because the core needs of these audiences differ so significantly from those of a traditional IT buyer. Although we agree that tech firms need to carefully incorporate the needs of business professionals into their marketing and strategy, technology firms need to manage these efforts carefully, invest in the right areas, and be prepared to make their efforts part of a long-term endeavor. At a high level, companies should consider how they align in three areas other than marketing:


Strategic support. Targeting business customers’ needs to be part of a broader strategy that brings in the right people with the right business skills. Companies usually do no develop their base of C-level relationships overnight — they invested heavily in a partner-driven approach that is supported by robust thought leadership and fundamentally linked to the way they do business.


Product value proposition. Targeting a C-level executive may make sense but must be relevant to the stakeholder in question. Noetic Labs has identified ways to evaluate the needs of IT buyers, line-of-business buyers, and senior management. If you expect your technology solution to resonate with the business buyer, the core value proposition should be aligned with his or her needs.


Sales alignment. The effectiveness of a business focus in marketing efforts must also be supported by a robust sales strategy. Making a shift from an IT-focused sales approach to a business-focused sales approach does not happen overnight. The content used has to be compelling and relevant to a specific business need, greater emphasis must be placed on the business objectives achieved, and measurable objectives must be outlined. Just as important, the sales force needs to be sufficiently supported to cope with the added time and effort required to invest in business-level relationships.
These three areas should highlight the challenge that many companies will face as they try to transform their technology companies from IT-focused to business-focused. Despite the time and investment required, however, there is tremendous opportunity for companies that can do this well. As noted, business alignment is consistent with near-term and long-term market trends — meaning it should increasingly be viewed as a key component of strategic planning. 

The Informal Insurance Policy

"Why is this not what we asked for?
This is what you asked for.
No it's not.
Yes it is!
No it's not!
Look at your documentation it's just like you asked for it!
I never signed this document!"

How many of us have had discussions like this in our organization? How did documentation become the insurance policy between the business and IT?  Why is it that a signature on requirements documents are never completed until the last minute in the project?  Of course we all know why, regardless if we will ever publicly disclose it.

Okay I will spill the beans, it's because everyone reserves the right to change it up until the last minute before delivery.  They reserve that right because they often don't know what the customer wants or IT does a poor job delivering what the business wants. By holding documentation hostage, business and IT will use that document as an insurance policy.  Some call it CYA while I just say it's creating an environment of tremendous waste.  Often in organizations the collaboration between IT and the business (yes most of you know I hate that phrase) is so tense that a requirements documents is used as a mechanism to cover your backside.  Agile's answer is customer collaboration over contract negotiation and/or working software of comprehensive documentation.   Lean likewise is similar with focusing our energy on delivering customer value over wasteful activities.  These philosophies have taken a distinct position against unnecessary documentation because they know it prohibits collaboration and any resemblance of value based delivery.

The majority of organizations believe that documentation is the collaboration tool which delivers the right solution to the customer.  This rarely is true if ever and I often see when consulting a client that documentation is used as a reason (or excuse) not to deliver value to the customer.   For those of you who as an organization live and die by documentation ask yourself, what real value does documentation serve in my job?  Does it serve as my professional insurance policy?  When does the document get signed?  Why does it even need to be signed?  What purpose does a signature even serve?  How often is the document used as a device of threat and intimidation?

I'm not suggesting that there is no need for documentation as I believe there's plenty need in plenty of activities.   Arguably though I believe 90% of the perceived need disappears when organizations value stream their process and measure if it's delivering value to their customer.  Documentation is an important part of any organization, but unlike traditionalists who often see documentation as a risk reduction strategy, value based delivery sees documentation as a strategy which increases overall risk the more emphasis placed on it.  The answer is simply to write documentation when that's the best way to achieve the relevant goals.  Question what those goals are though that require documentation that ask for signatures or are used as clarification.  If documentation is being used in place of collaboration then you should be worried as an organization. 


If you're organization is heavy in documentation I would like to hear from you.  Is the reason you document to act as an insurance policy?  If it's an insurance policy how is trust viewed in your environment?  How is your relationship with other business groups?  How often does your customer accept your first pass as acceptable? How does your organization understand the concept of value delivery?  My experience tells me that if any of these questions are answered in a negative light then you are document process intense.  Likely if you are document heavy then you work in a command and control environment with contentious relationships.  If you work in a trusting environment where the distinction between you and other business units is blurred and you have a great collaborative relationship with your peers then I will go out on a limb and propose you have limited documentation.  Environments of trust create minimal documentation.  Which environment do you work?  I'm interested to hear how your firm uses documentation and how you collaborate.   

It's Almost March, How is Your Budget? Oh That's Right You Don't Care Until October....

Everyone has to deal with budgeting.  Budgeting is simply the process of determining how to fund your expected needs in a project.  Budgeting is not a process with an extensively long history.  Much like most modern management it is a function of how organizations with tremendous growth planned spending. They determine how people behave in any given situation. Focusing leaders' minds on the stewardship of shareholders' funds and ensuring that managers worried about controlling costs were its original functions, and leaders and managers, by and large, behaved accordingly. But budgets have since been hijacked by a generation of financial engineers that have used them as remote control devices to "manage by the numbers." They have turned budgets into fixed performance contracts that force managers at all levels to commit to delivering specified financial outcomes, even though many of the variables underpinning those outcomes are beyond their control. This leads to undesirable and, in many cases, unethical behavior.

How has budgeting and the finance process stiffed innovation to the extent where over 90% of professionals look at budgets in negative terms.  Why is there not more outrage regarding how the process denies agility?  Lean and agile models work towards delivering value while adapting to changing business needs.  I believe there is nothing more threatening to an agile and lean process then the limitations set forth with a budgeting process.  When budgets are calculated to forecast something a year to six months out how can this possibly foster value creation? Budgets are a modern day contract where the budget contract is usually fixed for a period of twelve months. Its purpose is to commit a subordinate or team to achieving an agreed-upon outcome and then to enable a superior to control the results against that outcome (reserving the right to interfere and change the terms if necessary).


How have we arrived at such high levels of dissatisfaction with budgeting? There are three primary factors: (1) Budgeting is cumbersome and too expensive, (2) budgeting is out of kilter with the competitive environment and no longer meets the needs of either executives or operating managers, and (3) the extent of "gaming the numbers" has risen to unacceptable levels. Few senior executives seem to be aware of these problems. They see outcomes in terms of numbers rather than behaviors. In this context, budget contracts can act like drugs. They seduce executives into believing that they have control over their future financial outcomes. But, like most drugs, they have serious side effects. They lead both senior executives and operating managers into an annual performance trap from which it is difficult to escape.


In these turbulent times the budgeting process struggled to cope. Goals and measures were internally focused. Intellectual capital was outside the orbit of the budgetary control system. Innovation was stifled by rigid adherence to fixed plans and resource allocations agreed to twelve to eighteen months earlier. Costs were fiercely protected by departmental managers who saw them as budget entitlements rather than scarce resources. The internal focus on maximizing volume collided with the external focus on satisfying customers' needs. And far from being empowered to respond to strategic change, front-line people found that it was easier to do nothing than to try to get multiple signatures on a document authorizing a change in the plan.


The organizations I have worked with used to set targets on the basis of financial numbers that, more often than not, were negotiated between superiors and subordinates before the start of the year. These numbers were fixed for the year ahead and represented the key component of the annual fixed performance contract. All actions were then focused on meeting the numbers not on value delivery. However, whether this process maximized the profit potential  is doubtful given the desire for superiors to stretch ambition and the desire for budget holders to play safe.


What does the Lean Technology Transformation do to solve this?  Well it's not so simple but here are some ideas.  What holds your organization together is not a plan, but a commitment to a clear purpose and to a set of clearly articulated principles and values.  To create value intellectual capital needs to be set free from stifling bureaucracies, free from the restrictions of predetermined plans, free from the fear of failing to meet fixed targets, and free from the forced cross-company actions designed by central planners.  Agile leaders set targets based on high-level key performance indicators (KPIs) such as return-on-capital, free cash flows, or cost-to-income ratios. Goals are typically set at levels aimed at maximizing short- and medium-term profit potential at every level of the business. Managers are willing to accept (or propose) these stretch goals because their performance will not be evaluated and rewarded against them. They will subsequently be measured and rewarded using a range of relative indicators such as peer group performance, internal and external benchmarks, and prior years' results. "Baseline" goals set a lower reference level of expectations. Though goals are primarily financial at the highest level, they become more operational the nearer they are to the source of value delivery.

By making this transition The benefits are that the process of setting targets is fast (days rather than months) and because it is based on relative measures it will seldom need to be reset. Also, because the benchmarking bar is always being raised, it is more likely to maximize profit potential. Some project leaders figure they have saved 95 percent of the time that used to be spent on budgeting and forecasting. This time is more usefully spent on planning how to create more value for customers and shareholders as well as how to respond more effectively to change.

Changing to a more updated model fundamental matches the goals of a lean organization.  The impact on the behavior of front-line people must not be underestimated. It leads to what Harvard professor Chris Argyris calls "internal commitment." The hidden problem, according to Argyris, is that people have to deal with two types of commitment. First, there is external commitment, which, by and large, leads people to fulfill contractual obligations specified by others, and in which performance goals are top down. Second, there is internal commitment, which allows individuals to define their own plans and the tasks required to fulfill them, and which is participatory, comes from within the individual, and leads to people taking risks and accepting responsibility for their actions.This is the behavior that the relative improvement contract seeks to encourage. The rhetoric of leaders does not produce internal commitment any more than it leads to effective empowerment or personal responsibility. Such changes require a fundamental change in the process that determines the behavioral context.

Finally, what needs to happen in the firm is a decentralization which enables leaders in your high performance teams.  Below are six common principles which organizations who have made this break posses:

1. Built a governance framework based on clear principles and boundaries
2. Created a high-performance climate based on the visibility of relative success at every level
3. Provided front-line teams with the freedom to make decisions that are consistent with governance principles and strategic goals
4. Placed the responsibility for value creating decisions on teams
5. Focused teams on customer outcomes
6. Supported open and ethical information systems


The leaders in question have abandoned the notion that employees base their commitment on mission statements and detailed plans prepared by someone else. They have abandoned the command, compliance, and control approach that assumes that strategy formulation and execution take place in separate compartments. And they have abandoned the assumption that front-line managers cannot be trusted with the responsibility to think and act on the latest information in the best interests of the firm as a whole. They have built a relative improvement contract based on mutual trust, with clear responsibilities for high-level performance from front-line people. They have also built a community spirit that reflects the interdependence of the organization and that supports seamless solutions for customers. Above all, they have recognized that people respond more positively to clear values and principles than to nebulous mission statements and detailed plans.