Budget Elements
The Problem
In the world of customer participation, continuous innovation, lower barriers to entry, and faster supply chain, companies with inflexible budgets will find it challenging to compete. The annual budgetary cycle is not designed to adapt to sudden changes in the market.
Traditional budgets have been designed for corporate efficiency, but in the globalized world, the cost is no longer the main competitive advantage. Someone can always do it cheaper. The key competitive advantage is differentiation through innovation.
The annual budgeting process is one of the main components of the outdated management system of command and control.
Besides, budget targets are often unrealistic anyway.
The Solution
Peter Bunce (1) suggests starting a transformation from a command and control to an adaptive management model by separating the three budget elements and improving them separately. Please see the picture above.
Takeaway
I have provided more details about dynamic resource allocation here. You may be familiar with it as "metered funding," coined by Eric Reis (2).
A budget target essentially turns into a vision and an outcome-based roadmap for the enterprise, which then cascades to product portfolios. Each product portfolio then invests in a healthy balance of all three horizons.
For a forecast, I propose to set goals and KPIs per product team as part of sPDLC. Many of the team KPIs can be aggregated and reported per product portfolio and then aggregated further for the whole enterprise. I will provide more details about the portfolio and enterprise KPIs separately.
References
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"The leader's dilemma" by Peter Bunce
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“The startup way” by Eric Ries