Funding Model: The Seven Domains of Transformation

Why Is the Funding Model Important?

In traditional project-based technology organizations, funding for the technology group is derived by executive leadership based on a prioritization schedule of big-ticket items stacked up against historical overhead expenditures.

This budgeting exercise is a painful process and is nothing more than a wild guess at how much funding will be necessary to meet the needs of their business counterparts. This common practice results in management struggling to manage a budget that was set up to fail before funds were even distributed.

Unfortunately, most organizations continue to use this imprecise method of funding. An indicator of success in product-centric delivery is an increased focus on funding capacity and outcomes instead of blanket funding requirements.

All domains of product transformation require a large amount of fortitude and resilience from the transformers. Organizational inertia is strong in every corner of the organization, but altering the funding model may be the most difficult part of a transformation. Preconceived notions of how time is kept, how assets and projects are capitalized, and how departments are held accountable may be some of the most difficult structures to overcome.

With that being said, if you can work within the boundaries of your organization’s current funding model to incubate the transformation, changes can be introduced slowly and show a great deal of success with the transformation.

What Is the Funding Model?

The funding model is crucial to scaling your transformation. Although you can typically start a transformation and incubate a few teams within a traditional funding model, an antiquated funding model will create a huge amount of friction to the success of your transformation because of the difficulty in showing business outcomes and value from the product teams.

Product-centric organizations hold leaders accountable by encouraging results that deliver value to both the business and the customer, whereas project-based organizations use budgets and timelines to measure success. The phrase “on time, on scope, on budget” has no place in a product organization. Product organizations are held to the standard of delivering value to the customer rather than simply meeting a set of requirements.

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Through our interviews, we noticed that an organization’s funding model could either be an impediment or a catalyst to shifting from project to product. Many responses highlighted the role of finance and funding in a successful shift.

While the responses all indicated the importance of the funding model in the transformation, there was a wide range of variance in how organizations encountered and managed this domain. From this, we were able to gather the following practices and recommendations in terms of how the funding cycle interacts with the transformation.

How Are Enterprises Achieving Success?

It became apparent very early in our research that the funding model in large enterprises was typically one of the last domains to show significant change. Using the three-stage model of incubate, scale, and optimize, the incubation stage showed the least amount of change in the funding model across all of the transformation interviews.

Incubation Stage: Funding Model

A good rule of thumb for the funding model in the incubation stage is to “fight winnable battles.” Transformation teams used several strategies that became the incubate indicators:

• Work within the budget and financial constraints: This indicator suggests that you shouldn’t try to fight the budget but use the existing structure to experiment and learn the mechanics of the transformation before biting off more than the organization can chew. Understand what constraints the current budgeting model may impose on your transformation and find ways to leverage the PMO reviews to show the value your transformation has and how you can continue to operate within those constraints, even though they can be cumbersome and cause unnecessary friction.
• Establish pilot teams as capacity-driven: For organizations with a more forward-thinking financial department that was willing to experiment, small teams were established and “funded” for a short time. During that time period, team leadership reported outcomes to the finance department to show value-driven success. This indicator often increased the velocity of acceptance among other teams when moving into the scaling mode of the transformation.
• Use quarterly/biannual funding for piloting teams. To introduce more accountability for product team leadership and show that accountability to your finance teams, reject the idea of the yearly budget and use a “prove my worth” model by requesting that funds be released to teams quarterly or biannually instead of annually. This practice requires the product teams to present their delivered value prior to receiving any funds.

Scaling Stage: Funding Model

Once organizations find traction in their transformation and move out of the incubation stage and into the scaling stage, they encounter a different set of indicators. From our interviews, the scaling indicators build upon the incubation stage, often solidifying and standardizing earlier transformation efforts.

• Shift from project to team-based funding for technology investments: Building upon some of the small changes made to funding pilot teams, this indicator pushes the organization further along the product model. If the technology organization can embrace the transformation, a good way to scale up the number of teams running a capacity-based funding model is to use the technology budget to begin the larger transformation.
• Create a “Strategic Investment Committee”: Several of the enterprises we interviewed used a committee or board to distribute funds across the organization based on business cases. One of our interviewees described a committee with this function as the “Shark Tank.” In the Shark Tank model, business and technology leaders present their epics to the committee. The Shark Tank committee asks the tough questions and, in the end, assigns funds based on the most compelling business cases.

Optimize Stage: Funding Model

Since the funding model domain seems to trail other domains in its ability to permeate the business-side of the enterprise, the optimize stage is where the business and technology groups start funding capacity and value as a single organization.

• Focus on alignment between business priorities and product funding: This indicator is important in the optimize stage because value is derived from business priorities. To truly measure whether value is being derived directly from priority investments, teams must correlate their capacity and cost of that capacity to the value derived from what the team delivers.
• Expand funding model to non-technology investments: This indicator is very similar to the previous one. As the transformation hits the optimization stage, the product funding model must be applied to all aspects of the business.

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One Size Does Not Fit All

Based on our interviews, it appears that the path to transformation was idiosyncratic based on the specific enterprise. We noticed several organizations were in the process of either changing or reviewing how funding was provided and released to software and IT initiatives, and how value delivery was tracked by their financial partners.

For example, the technology leadership team at one organization realized that projects and time tracking were an impediment to innovation. To combat the friction to innovation, the transformation team spoke to an external finance team at another large tech company who made the case that, at the accounting level, tracking time for software delivery projects was fundamentally flawed. This information motivated the organization’s finance team to shift to a model that was shown to be more effective by a software innovator.

However, when it came time to implement the model, there was no clear replacement within the organization, and the change was limited to select customer-facing teams. This is an excellent example of how changing the funding model domain can be very difficult at an enterprise level, requiring a large amount of political capital and partnership with the finance organization.

Another common trend was a lack of consistency in what was funded. Organizations that embraced Agile were exploring the funding of features and epics. Those who were deploying the “Spotify Model” were exploring funding teams, otherwise referred to as capacity. Others were exploring funding strategic initiatives and in one case OKRs themselves.

Best Case Scenarios

Some of the best-case transformation scenarios were also uncovered during this exercise. Indicators show the practices that most should follow and look to implement, but the scenarios below are unique to organizations fertile for more aggressive tactics:

• Involve Finance from the start: When making a shift that affects the funding model, make Finance a key stakeholder in helping define the end-state. The new model must support the way Finance will track value and delivery. Involving Finance at the tail end can result in a product operating model that is not aligned to business operations overall, which can stall or derail the transformation.
• Define end-to-end value and cost metrics: Finance already has methods for tracking the cost of development and other functions. According to Donald Reinertsen, author of The Principles of Product Development Flow, the most important part of product-orientation is that value streams are tracked for life cycle profitability. If value streams are fragmented, end-to-end metrics cannot be tracked or funded, which inhibits the key shift of moving from a cost-centric operating model to a profit-centric one. In Project to Product by Mik Kersten, the Flow Framework proposes the tracking of flow metrics and business results in order to provide one such anchor for the finance team to switch the funding model to be based on end-to-end product value flow and cost.

Constraints That Need to Be Overcome

The largest and most prevalent constraints we encountered and documented in the funding model domain relate to how transitioning the funding model must at once overcome yet utilize the project-based funding gates that already exist.

• Technology organizations are treated as cost centers: In traditional technology organizations, the CFO and finance group see the technology investment as a pure cost center. In the 2018 DevOps Enterprise Summit London presentation “Project to Product: Practical Realities at a Large-Scale Enterprise” Carmen DeArdo contends that IT is viewed as a cost center with little to no capability to generate profit.4 With this myopic thinking, it is incredibly hard for technology and product leaders to make the value of their teams, their products, and the financial investments visible. This paradigm is a bit easier in a product-centric transformation because product owners tie technology investments directly to customer value. To continue combating this constraint, ensure that the value being delivered is visible.
• Business leaders expect to fund features: In project-based organizations, finance and business leaders expect a yearly budgeting exercise where they dream up some grand opportunity and go for a “big bag” of money to fund their supposed great idea that will take all year to deliver. From earlier indicators, we know that project-based funding is not the path to success. The product transformation must make the value stream priorities visible and show business and financial leaders that the capacity funded through the evolving model continues to deliver value. To combat the single annual budgeting exercise, ensure that leaders see how changing priorities equate to positive value for the customer.

Our subjects demonstrated how important it is to involve Finance in the shift from project to product. Although there is clear guidance on how to fund project-oriented initiatives, the lack of a clear model for financing products can be an impediment to true product-centric transformation. Drawing from successful models at other organizations or establishing best practices, like flow metrics in Project to Product, can help provide the finance team with a good foundation for change.

In the continuing posts in this series, we will explore each of the Seven Domains of Transformation in more detail. 

• Seven Domains of Transformation
• Transformation Implementation
• Business and Technology Synchronicity
• Product Taxonomy
• Workforce and Talent
• Funding Model
• Architecture
• Culture and Leadership

In the full white paper, The Project to Product Transformation, you will find not only the guidance indicators to create, increase, and sustain velocity, but also the negative force learnings that should help you avoid pitfalls in your transformational journey.

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