IT and finance leaders are increasingly working together to innovate and operate at the speed of agile, finding ways to effectively finance tech initiatives.
Flexible delivery of emerging technologies to drive business outcomes is fast becoming today’s competitive battleground. Deloitte research found that 56 percent of CIOs expect to implement Agile software development, DevOps, or a similar flexible IT delivery model to increase IT responsiveness1 and help spur broader innovation ambitions.
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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 capabilities.2) 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 (with unknown unknowns) is locked into a project plan with associated fixed project funding. Instead an “agile” approach—referring in this context to a state of being nimble or flexible rather than to Agile software development methodology—is capacity funded with a focus on maximizing outcomes.
Moreover, 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. The cross-functional teams model hails from an era that emphasized repetition and scale of known and knowable assets, unlike today’s innovation-focused digital age.
Over the next 18 to 24 months, we expect to see more IT and finance leaders working together to develop flexible approaches for funding innovation at the speed of agile. This does not mean they will replace annual budgeting cycles with a shiny, unproven alternative. Indeed, balancing fiscal control and appropriate spending with value creation and financial results is a nonnegotiable requirement. There are multiple approaches that can help maintain the balance:
Unlikely, you say? Convincing your CFO to alter long-standing financial processes may be a hard sell, at least initially. What’s more, external funding opportunities may sound promising but could introduce risks that give CFOs pause.
Yet there are strong incentives for both CIOs and CFOs to find ways to reimagine finance to bolster technology’s potential. As more large organizations demonstrate agile’s positive impact on speed to value, flexibility, and responsiveness to market needs, their competitors will likely launch their own agile initiatives at speed and scale.3 Building distinctive, disciplined approaches now can lead to sustained competitive edges. The time for CIO-CFO collaboration on this issue is now.
The tension between IT’s funding needs and finance’s long-held processes did not appear overnight. It has been building slowly over the last decade as cloud and platform technologies steadily disrupted operating models in ways that cause the finance function to reevaluate its methods.
As CIOs and CFOs look for ways to better meet their respective needs in the coming years, there are three central problems to consider—all of which trace their roots to the early days of the digital revolution.
As part of the finance and the future of IT trend, we expect to see more CIOs, CFOs, and their respective teams explore ways to address these and other funding, accounting, and reporting challenges.
CFOs and their organizations can be the arbiters of rapid change, balancing necessary controls and risk management with modernized techniques for budgeting, deploying funds, and working with technology and business leaders to continuously monitor and optimize impacts. Some techniques include:
Big changes need to happen with the IT organization as well—ideally in the spirit of, if not the structure of, drastically improved alignment and collaboration with the finance organization. Areas to consider include:
The digital transformation underway at many organizations requires additional sources of funding to enable the kinds of changes needed to keep disruptive competitors at bay. As part of the finance and the future of IT trend, we expect to see more CIOs, CFOs, and their respective teams explore the following:
In its simplest form, the Agile software development boom is a decades-old, IT-centric construct that, after years of evolving, now offers the business and IT an opportunity to work together more effectively and efficiently. The move to DevOps has amplified the opportunity by making sure the business and the “run” and “build” houses within IT come together. Likewise, DevSecOps11 enables tighter integration of yet another function. Funding the pursuit of agile opportunities has been both complex and challenging; it’s now time to bring finance squarely in the fold of tomorrow’s technology engine.
The why is simple. Funding at the speed of agile optimizes for the fast flow of safe value. In order to survive and thrive, organizations should adopt new ways of working to sense, explore, invent, and innovate. Beyond strategic positioning, it can drive material impact in the market and ultimately affect the valuation of the organization. On average, product companies have valuations that are 1x their revenue. For service companies, the average valuation is 2x their revenue. For platform companies, the average valuation is 8x the revenue they generate.12
Transitioning fully to a new funding model won’t happen quickly. For at least the near future, you can run both old and new funding approaches in parallel as you further refine your processes and establish governance guardrails. But ultimately, the journey can be worth it. The more you embrace tech futures, the bigger the impact your efforts can have on the way investors, customers, and your people view your organization and its future promise.
From online banking to cashless commerce, traditional financial institutions are embracing change to survive—and Nationwide, the United Kingdom’s 130-year-old building society, is no different. Leaders wanted to deliver more value and services to Nationwide’s 15 million members to excel in an environment of digital disruption and increased regulation. In late 2018, the Society hired Patrick Eltridge13 as its COO, aiming to transform the way the organization works.
Before Eltridge’s arrival, IT and the digital business group had launched several Agile initiatives, and Nationwide now looked to create a more cohesive, enterprise-level approach. Eltridge set out to shift the organization’s legacy systems away from waterfall methods, which he views as promoting “the illusion that you can fix the time, scope, and cost of work and hold people accountable for immovable milestones.”
Eltridge’s charter was to introduce the agile mindset across the enterprise. He approached finance leaders soon after his arrival, looking to partner with them to evolve their traditional accounting and investment funding processes to better align with IT’s Agile approach.
Instead of trying to explain—and win buy-in for—abstract agile processes, Eltridge engaged finance leaders with three commitments: 1) The monthly expenditure rate of IT change would be known and not exceeded, 2) change priorities could be revised in less than 30 days with minimal disruption, and 3) there would be no more unplanned software write-offs—all music to any CFO’s ears. Convinced of the benefits and validated by IT’s reputation for safe and reliable delivery, finance agreed to enable Agile methods and continuous funding in the coming year.
During the funding transition, the portfolio management office—renamed the Value Realization Office—continued to use waterfall or Agile methods, depending on the project type. But when the office needed to shift investment priorities, Nationwide had not yet defined a way to objectively evaluate the relative value of inflight changes across the entire portfolio. To resolve this, Eltridge introduced the “weighted shortest job first” (WSJF) prioritization method to help the team prioritize changes based on their projected economic benefit, which is estimated by dividing “cost of delay” by job size. WSJF is not a one-and-done process—the backlog of initiatives is regularly reviewed and reprioritized.
The Value Realization Office led the exercise, inviting product owners, architects, delivery leaders, and finance to discuss and vote on change priorities across the entire portfolio. The WSJF exercise accomplished the team’s goal of rationalizing budget and investment decisions—and generated an unexpected benefit. “Senior leaders left with a deeper understanding of the portfolio and interdependencies of the work,” Eltridge says. “Prioritization was a happy byproduct.”
According to Eltridge, “I’ve seen many organizations with a bottom-up, grassroots push toward enterprise agility, but that alone is seldom sustainable. This sort of change requires senior leadership understanding, trust, and sponsorship to last over the long haul. Leaders need to experience this way of working before they can internalize and understand it.” Patience and persistence are required.
Size and history don’t make an organization safe from rapidly evolving competitive pressure, and banking giant Barclays is adapting by leveraging agile ways of working. Nimble fintech startups, business model-changing emerging technologies, new consumer data protection regulations, and other industry challenges led Barclays to launch an enterprisewide agile adoption initiative in 2015. Since then, more than 800 teams—including the bank’s Trade and Working Capital (T&WC) business—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 T&WC.14
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.
Barclays’ enterprise operating model—and the organization’s mindset—are now fully adapted to the agile life cycle. One critical success factor was intentional communication with business partners—for example, educating the finance team about one project’s cone of uncertainty helped team members understand why agile was needed and how the new delivery model worked. Radical cost transparency has helped establish trust. Finally, improving visibility into the delivery process, taking the time to understand business priorities, and consistently meeting delivery commitments have helped improve cross-functional collaboration and build trust with business stakeholders. As a result, the T&WC technology team enjoys a high level of confidence from its business and finance partners when it comes to prioritizing, delivering, and funding features and products.
“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.”
For over a century, Rolls-Royce has pioneered some of the world’s most powerful and efficient engines. From its beginnings as an internal combustion engine manufacturer, the company has evolved into a leading global industrial technology-based innovator of intelligent and electrical engines, pioneering cutting-edge technologies to help the planet’s vital power needs. To facilitate continual improvement, Rolls-Royce is embracing digitalization across the enterprise to create entirely new ways of engineering, manufacturing, and serving customers.15
The transformative journey began in March 2018, when leadership restructured the company to drive more business value and improve cash flow. Rolls-Royce established several restructuring programs covering areas from culture and organizational health advancement to financial improvement and technology transformation.16 Anthony Allcock, director of IT business management and transformation,17 was charged with enabling the technology transformation by erecting a foundation to support agile ways of working across the enterprise.
Allcock realized that IT needed to lead the change to agile methods. A significant change in the IT operating model became critical to establish a foundation for transformation. By using a modern, product-oriented delivery model, they focused on delivering value more quickly across the company. If the organization tried to build a digital technology foundation using their traditional IT operating model, it would be too slow—IT would not be able to keep up with the pace of change in the business.
In the new model, IT and the business work as a team to achieve business outcomes. There’s more energy and empowerment in the organization and shared ownership of the corporate strategy. They have also been able to generate more value and improve efficiencies through simplifying and automating key processes. While there is still work to be done, the organization has achieved a 40 percent reduction in governance forms and a 60 percent reduction in management control gates.
In only eight months, Allcock and the team have made significant progress, with the organization meeting goals for releasing more value to the enterprise through agile processes. And the journey continues: The team has developed a plan for how it can shift to funding agile teams and managing investments in a way that supports Rolls-Royce’s digital transformation journey and long-term ambitions to deliver clean, safe, and competitive power solutions, while meeting financial goals.
Being agile is about developing a flexible—yet structured—approach to how the entire enterprise works together to create stakeholder value. Instead of completing predefined one-and-done projects, an organization builds and delivers products and portfolios of products to meet customer needs. It’s a cycle of continual improvement that supports learning as you go and adjusting direction as issues and opportunities arise.
Delta’s business is built on flight—one of technology’s greatest achievements. We work to provide an exceptional experience for travelers who trust us to comfortably and safely carry them on their journeys around the world. As technology continually evolves and accelerates, we are evolving with it to deliver more value to our stakeholders.
To accomplish this, we’re on a journey of our own to become more agile in everything we do. We started in IT, changing our applications and infrastructure to be more aligned with the business to enable new and better customer offerings. We jumped in, learning the mechanics of Agile, training our people, and running sprints and automated builds. Looking back, we were “doing agile,” but we weren’t yet “being agile.” Being agile extends far beyond software development—it creates more flexibility and responsiveness across the enterprise and delivers tangible value as outcome.
So we pivoted. We’re working with the business to shift our focus from projects to portfolios of products. For example, the account management portfolio includes products that enhance customer loyalty, including Delta Sky Club and Medallion status levels. And the catering operations portfolio includes new customer-focused products, such as enabling passengers to preselect their meals.
Our business team members are actively engaged in defining products within the portfolios and setting IT priorities. And in the spirit of being agile, we’ll refine these as we learn. We’re also changing how IT is funded—moving from project-based to product-based funding, with ongoing teams working in sprints to deliver a continuous stream of new and improved product features and value.
I’ve found that as companies shift from a project to a product lens, the agile mindset begins to ripple across the enterprise. At Delta, as IT becomes more agile, the business is changing too, creating new roles for product owners and managers while adapting their ways of working. Sustainable change takes time, and we’re beginning to see a shift to more agile practices across the company.
My advice to other technology executives embarking on this journey is to recognize that building an agile enterprise is more than changing software development processes—being agile requires a cultural shift, beginning at the top. We’ve been on this journey for two years, and we’re seeing results by engaging people at all levels across the organization. Patience is required. The agile journey is one that never ends—there will always be opportunities for improvement ahead.
As the pressure to do more with technology increases, the business and IT can no longer remain separate operating entities. By aligning both to products or value streams, organizations can develop greater confidence in their technology investments. They can create joint outcome road maps and measure key results along the way with greater precision and accuracy. Moreover, as traditional boundaries separating the business from IT disappear, leaders are making increasingly complex technical innovation decisions. As such, organizations should work to find the right combination of CFO, CIO, or other CXOs to govern decisions. Even in organizations actively exploring new ways to fund innovation, decision rights are likely not on anyone’s agenda at present. This will change: Left unaddressed, this issue could easily become an insurmountable barrier to change.
Funding IT has often felt like more art than science, from estimating costs and timelines to measuring results. And it’s becoming more complex—whether dealing with the impacts of adopting enterprise agility or understanding the funding investment options from the hyperscale cloud providers. For example, responding to the pace of external disruption requires more than just a matter of transitioning from an annual to a rolling funding model. Agile requires changes to internal controls, financing mechanisms, and to established accounting and auditing processes. And notably, financial planning and analysis (FP&A) teams may need to develop more flexible approaches to forecasting profit and loss for income statements and to calculating operating performance. Further, depending on the magnitude of investments made in digital transformation, CFOs may have to renegotiate the way they report earnings to accommodate new FP&A approaches and open-ended investments that offer uncertain outcomes.
The same pressing need for greater enterprise agility that drives the finance and the future of IT trend also challenges chief risk officers and other leaders to reevaluate the way they understand and manage risk. Going forward, risk—like finance and other enterprise functions—should become enablers of innovation rather than impediments to it. One approach involves thinking about potential risks that could arise in a future that is largely unknown, rather than basing risk assessments on current or past activities. Consider the kinds of cyber risks that companies currently associate with technologies such as cloud, blockchain, or next-generation customer experience solutions. They often include factors like limitations on liability and identification of third-party risks. While certainly relevant, these factors apply to yesterday and today, not tomorrow. Viewing innovation through a backward-facing lens—whether for purposes of funding or assessing risk—not only places limitations on innovation’s potential but may ultimately undermine competitiveness at a time when speed-to-market is more important than ever.
The work of transitioning to new finance, budgeting, and accounting processes that support agile innovation will not happen overnight. This is a tough nut to crack. But some companies are already embracing this trend, shifting from time-based projects to long-lived products and taking a portfolio view of their innovation investments. In general, these are companies with strong approaches to horizon investments and maturing Agile development capabilities. They are already living with the challenges that are driving this trend and will likely be the first to enjoy the competitive advantages that come when finance funds innovation at the speed of agile.