The correct funding question is...

The stakes (literally) are high. Many of us have experienced the meticulous task of assembling a budget or crafting a funding request for a project or product.

After investing months in compiling all the data, the pivotal moment arrives during the finance meeting where our idea's fate hangs in the balance.

Yet, in the presence of senior leaders, all that echoes is a single, decisive question:

"Just tell us how much it is going to cost!"

I understand why this approach feels like it makes sense, but it is fundamentally flawed.

The simplicity of 'Just tell us how much it is going to cost' belies the complex web of uncertainties inherent in early-stage initiatives, often leading to overruns and the dreaded sunk cost fallacy.

What if we dared to invert this scenario, challenging senior leaders with a profound question that transcends mere costs:

'How much do we, the organization, want to invest in this solution?'

Now here is where the debate can begin about what is a product/project/initiative/solution.

For this article, let's use the term "the solution" to be all encompassing of those items.

"The solution" could be

• A digital product like a website or mobile app
• A physical product
• A support function like a call center or IT support team

Now we are focused on a knowable thing, how much we WANT to spend, instead of a thing we can't possibly know, how much we GUESS it will cost to build?

In today's business landscape, we are often confronted with vast amounts of uncertain information, requiring us to make educated guesses about the associated costs. The challenge lies in acknowledging that these estimates are inherently speculative.

Due to that cost speculation up front, projects tend to exceed both budget and schedule expectations, leading organizations into the sunk cost fallacy trap. (91% of project go over budget)

And now that we have guessed at a budget, senior leaders and people attached to the solution, anchor to that number, regardless of reality. Most of that is driven by fear!

I've witnessed numerous instances where fear of admitting initial misjudgments has led organizations to persistently fund flawed initiatives, simply because they were green-lit in the first place.

Nobody wants to look bad.

This "how much do we want to invest" approach completely flips the focus:

• In the realm of launching or revamping a product, this strategy stands out as a brilliant risk mitigation tactic. By setting a financial cap, we not only limit our monetary risk but also strategically invest our team's time and expertise, ensuring alignment within the specified budget and time frame.
• In the realm of budgeting for essential services such as call centers or IT support teams, the imperative emerges for teams to strategize on enhancing efficiency through automation and infrastructure consolidation. The overarching goal is to progressively optimize cost centers, ensuring that they deliver the same, if not increased, value while incurring reduced costs over time.

That gives you the "theory" behind agile funding.

Let's talk it through with an example.

Consider the following scenario:

Upon determining that an idea merits a $3 million investment, we embark on a meticulous breakdown of this sum, allocating funds for personnel, hardware, training, and other essential components. This deliberate approach ensures that the organization limits its potential losses to the predetermined $3 million cap.

The product team operates within the understanding that their resources are capped at $3 million, fostering a heightened sense of urgency. This constraint becomes a catalyst, compelling the team to concentrate on optimizing every dollar.

The mental model is clear: there is no additional funding beyond the designated $3 million. Consequently, the team strategically trims away superfluous elements, focusing solely on the indispensable components of the product that substantiate its value.

At a medical device company, I was asked to develop a product to enhance the tracking of stock held by sales representatives, commonly referred to as 'trunk stock' since these devices were typically stored in the trunk of their cars.

Conducting thorough financial analysis, we quantified the magnitude of this opportunity to be a substantial $30 million over a span of 5 years.

So the question is not, "how much will it cost to build this solution?", because we cannot truly know that answer.

Instead, I made this statement and question:

"This is a $30MM issue over 5 years. How much do you want to INVEST to try and solve this issue?"

The senior leader leaned back, a contemplative expression crossing her face. It was evident that she was delving into a more profound understanding of the situation, surpassing the conventional approach through which we typically presented the costs of solutions to her.

Maybe the medical device product example above does not resonate with you.

Instead, you're responsible for budgeting a support service within an organization – be it overseeing the IT department, a call center, or some form of shared service.

Traditionally, budgeting involves determining the current cost of running the service by analyzing actual expenses from the previous year. A standard practice might include adding a 5% buffer for the upcoming year, with negotiations often settling around 3% when faced with senior leaders' push-back.

However, this routine approach doesn't ignite a passion for enhancing the service or making it more cost-effective. It only advocates for the status-quo.

What if we shifted the question posed to senior leaders to...

"How much does this organization WANT to invest in the shared data warehouse?"

Again, we are familiar with our current expenditure and the often subpar service level provided to the organization, as reflected in consistently low ratings from internal customers.

However, posing the question of how much we can afford for this service compels us to optimize spending and sharpens the service team's focus on automation, streamlining processes, and retiring outdated services sustained merely out of tradition.

We can't spend the same dollar twice, so we must do our best to make the best "bet" possible, while limiting our downside.

This is hard. Funding is a challenge everywhere. Traditional funding has been fine in the past, but we can do better to make it through the next set of business challenges.

Persisting with poor financial decisions can shackle an organization, rendering it unable to pivot towards innovative ideas due to pre-allocated funds. Adopting a more (dare I say it) agile approach to funding, treating spending decisions as strategic investments rather than fixed costs, not only mitigates risks but also provides clear answers to the question of how much can be allocated for a targeted solution.

Teams I've guided through this agile funding approach have consistently outperformed their traditionally funded counterparts. They not only exhibit a heightened sense of urgency but also channel a more robust focus towards the IMPACT they aim to create. This agile funding approach not only provides clarity but also empowers teams to foster innovation and self-reliance.

I encourage you to give it a try – the results are not just better while the inherent risk limitation proves invaluable.

In a landscape where numerous products and ideas face failure, adopting this funding approach becomes a powerful asset.

Embrace the change, and witness the transformative impact on your organization's financial agility and overall success.

What do you think?

How do you deal with funding?

What creative ways have you solved this problem?

Please share your ideas in the comments or email me at [email protected] so we can learn from each other.

Have a valuable week,

Your Friendly Neighborhood Product Owner, Tom

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