Creating a new funding model for product-based IT

Shifting from project-based funding to product team-based funding is a major cultural and operational change – but can result in better relationships with business partners, and less expensive, more efficient ways to deliver higher-quality products.

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[Chris Boyd co-authored this article]

As technology departments shift from traditional project management frameworks to treating IT as a product, it is triggering a broader re-think about how technology initiatives are funded.

Under the existing “plan, build, run” model, a business unit starts by sending project requirements to IT. The IT team then estimates the project costs, works with the business to agree on a budget, and gets to work.

This setup has several flaws that hamper agility and cause headaches for all involved. Cost estimates often occur before the scope of the project is truly evaluated and understood, and any variations in the plan are subject to an arduous change control process. What’s more, funding for these projects usually is locked in for the fiscal year, regardless of shifting enterprise priorities or changing market dynamics.  

To achieve the benefits of a product-centric operating model, the funding model must shift as well. Rather than funding a project for a specific amount of time based on estimated requirements, teams instead are funded on an annual basis (also known as “perpetual funding”). This provides IT product teams with stable funding that can be reallocated as the needs of the business change. It also allows teams to spend time reducing technical debt or improving internal processes as they see fit, improving productivity and quality in the long run. 

“We have to adapt with governance, with spending models, with prioritization,” Intuit CIO Atticus Tysen said during a 2019 panel discussion. “The days of fixing the budget at the beginning of the year and then diligently forging ahead and delivering it with business cases are over. That’s very out of date.”

Business unit leaders may be skeptical at first glance: why pay upfront for more services than we know we need right now? A closer look reveals that this model often delivers more value to the business per dollar spent. For example:

  • Perpetual funding allows dedicated teams to have end-to-end accountability for the full product lifecycle, from introduction to sunset. This structure encourages teams to develop greater domain knowledge and to prioritize reusability and technical debt reduction, which can improve the technical estate and pay dividends on future iterations.
  • Rather than the business unit throwing business requirements “over the wall” to IT, business teams work directly with the product teams to co-author the product roadmap and validate the value, usability, feasibility and operational fit of an idea before it is prioritized in the backlog.
  • Perpetual funding promotes greater autonomy and empowerment since cross-functional teams are responsible for determining the best ways to invest on behalf of the business.
  • Progress is measured in terms of business outcomes achieved, and perpetual funding can be discontinued or reallocated by the business without a change control process.

Smart first steps

Shifting away from old ways and adapting a new funding model can seem like a daunting task, but you can get started by taking the following first steps:

Establish the baseline

First, establish the baseline to which you will measure the funding shift’s effectiveness. A technology leader must consider all the dimensions of service that will improve when making the shift. Two areas of improvement that have high business impact are service quality and price. To establish the baseline for service quality, it is important to measure things like cycle time, defects, net promotor score, and critical business metrics that are heavily influenced by IT solutions.

The price baseline is a little more difficult to establish. The most straightforward way we have found to do this is to look at the projects completed in the last fiscal year and tally the resources it took to complete them. Start with a breakdown of team members’ total compensation (salary plus benefits), add overhead (cost of hardware/software per employee, licenses, etc.) and then communicate that in terms of business value delivered. For example, “project A cost $1.2M using 6 FTE and improved sales associates productivity by 10%”. When phrased this way, your audience will have a clear picture of what was delivered and how much it cost. This clear baseline of cost per business outcome delivered will serve as a helpful comparison when you shift to perpetual funding and need to demonstrate the impact.   

Pilot the shift with mature teams

The shift to a new funding model will be highly visible to all business leaders. To create the greatest chance of success, focus on selecting the right teams to trial the shift. The best candidates for early adoption are high-performing teams that know their roles in the product operating model, have strong credibility with business unit stakeholders, and experience continuous demand.

In our work with large organizations piloting this shift, e-commerce teams often fit the mold because they have a clear business stakeholder and have developed the skills and relationships needed to succeed in a product-based model. Customer success teams with direct influence on the growth and longevity of recurring revenue streams are also strong candidates as their solutions (such as customer portals and knowledge bases) directly influence the degree to which a customer adopts, expands, and renews a subscription product.

Teach your leaders the basics of team-based estimation

Estimation in the product-based funding model is different than in the project model. Under the new model, teams are funded annually (or another agreed-upon funding cycle) by business units. As funding shifts to an annual basis, so should cost estimation. Rather than scoping the price of a project and then building a temporary team to execute it (and then disbanding after execution), leaders should determine the size and price of the team that will be needed to support anticipated demand for the year, and then direct that team to initiate an ongoing dialogue with the business to continuously prioritize targeted business outcomes. 

When completing a team-based cost estimation, it is important to include the same cost elements ( salary, benefits, hardware, licenses, etc.) that were used to establish your baseline so that you are comparing apples to apples when demonstrating the ROI of product-based funding. Where you will see a difference in the team-based model is resource capacity needed to deliver demand. In a product model, a cross-functional team is perpetually dedicated to a business domain, and there is often zero ramp-up time to acquire needed business and technical knowledge.

Since the teams have been perpetually dedicated to the domain, they are encouraged to take a longitudinal view of the technology estate and are able to quickly identify and make use of reusable components such as APIs and microservices, significantly improving time to market. For these reasons, among others, teams in the product-based operating model with perpetual funding can achieve more business value for less cost.

Pilot teams should work closely with the BU leadership providing the funding.  Stakeholders should work together to generate a list of quantitative and qualitative business outcomes for the year (or other funding cycle) that also satisfy any requirements for existing funding processes operating on “project by project” basis.

Talk with finance early and often

If you don’t already have a great relationship with finance, start working on it now. Your partnership with finance at the corporate and BU level will be critical to executing your pilot and paving the way to wider enterprise adoption of team-based funding models. Ideally. Leaders should engage with finance before, during, and after the team-based funding model so that everyone is in lockstep with you throughout the pilot. This alignment can help bolster adoption with other areas of the enterprise.

Each finance department has unique processes, cultures, and relationships with IT, so while you will need to tailor your approach, you should broach the following topics:

  • Team-based funding basics. Explain the drivers for team-based funding, the timeline for a pilot, the mechanics of cost/benefits estimation, and how you plan to demonstrate ROI.
  • Business sponsorship. Let finance know that you have support from your corresponding business unit. In our experience, this goes a long way in the early phases of the discussion.
  • Baseline estimation. Discuss how you plan to develop your cost/benefit baselines to make sure you are thinking about your cost estimates accurately and holistically. At the end of the day, you will need finance to nod their heads when you demonstrate the ROI of the pilot and make the case for further adoption.
  • Funding process. Define how you marry your team-based pilot with existing funding processes. This helps ensure finance has everything they need in terms of qualitative and quantitative data to support the pilot in the interim.
  • Spend allocation. Discuss any changes to team structures that may impact finance’s attribution of spend to specific cost centers.
  • Capitalization. If you are currently a waterfall shop, communicate that your pilot teams will be working in agile to maximize the benefits of the funding pilot. Emphasize the need to agree on criteria for identifying capitalization candidates in the agile framework.

Evaluating success and sustaining success

Measure success and demonstrate value

You will need to achieve success in the pilot to bolster adoption in other areas of the business. Your success needs to be communicated in terms that resonate with the business. As your pilot comes to an end, gather your baseline data and match it up with the results of your pilot. Put together a “roadshow deck” to show a side-by-side comparison of costs, resources, and business outcomes (Business KPIs, quality metrics, cycle times, NPS, etc.) before and after the shift to team-based funding.

Depending on your organization, it may be prudent to include other observations such as the number of change control meetings required under each funding model, indicators of team morale, and other qualitative benefits such as flexibility. Have conversations with other areas of the business that may benefit from team-based funding (start off with 1-on-1 meetings) and offer to bring in your partners from finance and the product teams as the discussion evolves. The most important part of your story is that the team-based funding model delivers more business impact at a lower cost than the old model.

Results governance

Establish light and flexible governance mechanisms to monitor performance of the teams operating in the teams-based model. The purpose of these mechanisms is to validate that the increased level of autonomy is leading to high-priority business outcomes, not to review progress on design specs or other paper-based milestones. A $40B global manufacturing client adopting the team-based funding model established quarterly portfolio reviews with BU leadership and the CIO to review results. BU leadership reviews results of the teams and the planned roadmap for the subsequent quarter. BU leadership is then given the opportunity to reallocate investment based on changing business needs or can recommend the team proceed as planned. 

Change management

It is important to communicate that this process requires constant buy-in from business units. While funds will be allocated annually, demand will need to be analyzed and projected on at least a quarterly basis, and funds should be reallocated accordingly. In cases where investments need to be altered in the middle of a fiscal year, it is important to note that the unit of growth in this model is a new cross-functional team focused on a targeted set of business outcomes. The idea is to create several high-performing, longstanding, cross-functional teams that have the resources needed to achieve targeted business outcomes, rather than throw additional contracted developers at teams as new scope is introduced. 

Making the shift from project-based funding to product team-based funding is a major cultural and operational change that requires patience and a willingness to iterate over time. When executed successfully, CIOs often have closer relationships with their business partners, as well as less expensive, more efficient ways to deliver higher-quality products.

Copyright © 2020 IDG Communications, Inc.

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