Hack:
Decentralizing the capital allocation process

The McKinsey “Beyond Performance” book describes an interesting technique for depicting a portfolio of initiatives using a matrix view, although the immediate purpose is somewhat different than capital allocation.

One axis represents the degree of familiarity, unfamiliarity or uncertainty. One axis represents the time frame as short range less than two years, middle range up to three years, and long range up to five years. The relative size for representing each item proportionally indicates anticipated value. In this way, a balanced scope of objectives can be maintained.

Such a method might define a framework for allowing upper management, cross-functional teams and an overall steering group to respect a shared mission and vision. Business purposes should be well endorsed and well defined. Expectations could be permitted to respond with flexibility to differing profiles, based on risk and reward.

The notion of allowing some efforts to run on agile standards, while other efforts can run on more traditional project management standards, might be considered as well. And, one added component might involve a task mission specifically directed to identifying and capturing shared advantage benefits, across a variety of initiatives.

JR

Tom,

Thank you for a great hack. Your proposal solves many of the problems associated with traditional capital budgeting. You did however recommend to "establish a portfolio of funds". If this means predefining available funds, how do we know what that number should be? The more detailed the portfolio split is, the harder it is, as these are not static numbers. They are driven both by available projects and by our financial and execution capacity (money, people). Both keeps changing and the totality must be managed continuously and dynamically.

This does not mean that we should manage in the dark. Dynamic forecasting of both capacity and project portfolio developments (approved + in the pipeline) create comfort that we are moving in a direction we are comfortable with. But our investment forecasts are not resource allocations, as this should take place at each project's approval point. This split between forecasting and resource allocation is key. I agree with the comment below about avoiding the "budget" word, as this typically is used for both these very different purposes.

You might want to check out how we try to do this at Statoil through a "Dynamic Resource Allocation" process (see the MIX story “Taking reality seriously”.)

Tom

It was great to meet you a while back and I apologize that I have been overcome by events so not able to participate in the discussion. I have a few questions, offered in the spirit of making the hack tighter.

I like the idea of creating funding pools based on objectives that will cut across the organization. Managing them via a cross functional team is a good way of reflecting the nature of the investments. But the question I have is what do you need to do organizationally to make this work?

Do you need to provide a different level of financial acumen and transparency across the organization and management team?

I would think that if you are going to work across the functions that i will be important to give people the tools and the information to make their own assessment of the progress and results the cross functional investments.

For example, do you use a social media collaboration space to share progress and issues so everyone can see the results and decisions? That way by making it visible to everyone, you might reduce the information hoarding that centralizes capital allocation.

Another thought, which was something we did when I was at Accenture was to great an organizational structure based on nodes and programs to handle these types of investments. A node had people but no budget. A program had budget, but no people to do the work. The idea was to create a market where ideas met people. It was not perfect but it did go a long way to making things more cross functional. Now I know that there are some unique aspects of a consulting firm, but it seems to me that this is an idea worth considering.

So I am wondering that while metrics are important, do we also need to consider creating an alternative information and organization structures to reflect the decentralization of such an easily centralized resource.

Tom,

Sorry, just as I hit submit I had another idea.

Extend the portfolio concept to the cross functional team. Let it be a "volunteer" activity (you have to sing up like Morning Star's Colleague Letter of Understanding to tap into the social intrinsic motivation), except for a core team, make "membership" dynamic (like open source projects), let hierarchy and authority emerge (and shift over time), etc.

Tom ,

Sorry I am so late joining in on this hack - I will try and check in a couple of times a day from now to Monday.

My initial reaction is that words matter, a lot. I would argue to not use the word budget - for anyone other than a controller (;-) ) the evoked set of images are not pretty. I think it would be more successful if you created "portfolio funds" (not wedded to any specific words, these are just to convey the idea) and each core business objective has a BHAG (big hairy audacious goal) return expected from that portfolio. Also, by using investment / portfolio terminology you can begin to escape the calendar cycle (portfolios don't die every year like a budget does). We all can learn a lot from Statoil about escaping the calendar.

You are spot on about the cross functional team - most breakthrough or disruptive innovation comes from either market / industry / business adjacent areas (computer company steals entertainment industry business) or the mashup of separate functionality / capabilities.

Would suggest putting a lot of thought into measurement - the BHAGs should be more than just financial (lots of examples on the MIX) and the incentives as well - watch Dan Pink's video http://www.youtube.com/watch?v=u6XAPnuFjJc I am becoming more convinced that the key to real innovation is in finding ways to tap into peoples (staff, contractors, customers, suppliers, etc.) INTRINSIC motivations, not money. Much harder, but if it were easy, everyone would be doing it. How do you raise a pirate flag in a bank?

I think this is a great hack, looking forward to seeing how it progresses.

Hi Tom, this is a great idea and I'd love to flesh this out further with you... had one potential build to your hack: after the funding pools are assigned to each corporate objective, and each cross-functional team lays out an initial blueprint for how the funds should be allocated, why not involve a large portion of the company (say all of those in management positions) in providing feedback on those blueprints?

This would have two distinct advantages: (1) better choices/decisions since the plans reflect the collective intelligence of the company and (2) better execution because those asked to implement the plans have been involved in the decision-making.

An instructive example of a more participatory planning process comes from HCL and their "MyBlueprint" initiative, which is summarized as part of this blog from Gary: http://blogs.wsj.com/management/2010/07/06/hcl-extreme-management-makeover/

Look forward to hacking this together with you, Tom...

Michele