Traditionally, a company’s finance department funds IT as either one-off projects or business-as-usual activities. The former typically takes capital expenditure and business cases, while the latter usually rolls into operating expenditure approved in the annual budgeting process.
But agile delivery demands something different – continuous value stream funding. Value streams aren’t one-off projects and they aren’t part of the everyday running of the IT enterprise. Instead they continuously build on the product or service to ensure it’s always fit for purpose – technically and to meet changing customer needs. And that means they need some capital and some operating expenditure to ensure sustained delivery of value.
This can be a big leap for some CFOs who are used to business cases with defined timelines, costs, scope and benefits. Value streams don’t have an end date, and their costs and scope depend on the changing needs of the organisation.
So, how can CFOs and CIOs work together to ease the transition to this new, agile world?
In my experience, there are three areas of focus for this collaboration that will help effectively finance value streams and unlock the benefits of agile continuous delivery.
The concepts around value streams and continuous funding are new, so take the time to work together with a small group from finance and IT to understand this new way of working. The key is to define the types of work: what’s business as usual, what’s a project and what’s a value stream. This will enable the finance team to see what’s different and agree definitions with IT colleagues.
We’ve seen teams run this exercise and agree clear definitions that they solidify in a short document. This helps, especially when working out budgets. That’s because finance need to review the funding of value streams every year and build it into both operating and capital budgets. The definitions ensure there’s the right mix and levels of funding after each review.
Did you know the top 10% of financial performers are 30% more agile than the rest?
Often, before we can start funding value streams, there’s legacy technology to deal with. Where legacy technology is no longer fit for purpose, you’re likely to need an initial transformation project before the value stream gets going.
Agreeing the funding model between finance and IT will help make things clearer for the initial transformation and the ongoing value stream thereafter. There are three aspects to this:
Firstly, the transformation project is likely to take a traditional approach, putting forward a business case for approval. And it will primarily take capital expenditure, with some operational spend for elements like initial business case development or options evaluation. But when your goal is to have agile value streams, you need new thinking around the business case. That’s because you’re not just transforming and then running the new system, you’ll need funding to continually improve through the value stream. So, the business case needs to include funding proposals for all three.
Secondly, agreeing the budget lines that make up the running and continuous improvement of the service will help provide visibility. Typically, this includes entries for hosting, DevOps (or development and operations), security, data and other costs such as licenses.
Both these aspects should be in the business case for the transformation and look five years ahead. This will give a clearer total cost of ownership for the service over the period, informing business case decision-making.
Lastly, IT assets traditionally have a defined life. When the system is live, the finance team starts depreciating the capital expenditure to match the useful life of the system. But with value streams delivering continuous improvement, the asset’s life will continue beyond the typically expected period. So, finance should revalue the asset over time or depreciate later capital expenditure over a new period. The CIO and CFO will need to agree what works for their organisation to ensure depreciation charges are as expected.
Once a transformation project has delivered a minimum viable product, further funding is then agreed based on the business case and updated as data comes through. This funding then enables IT to continue to build on the initial release.
This is where the value stream comes in. Using the funding agreed in point two above, the value stream can expect the funding to continue across the agreed budget lines. This lets IT provide enough resources to continue running and improving the service as part of the value stream for that product. If there are later changes in funding due to changing priorities, IT should have the time to change resource levels and the value stream capacity.
In our experience, this approach ensures finance and IT are on the same page, allowing value stream funding that enables continuous delivery of improvements with the ability to adjust funding levels over time as priorities change across the business.