Managing costs provides a false sense of security

This content is syndicated from Energized Work | agile in action by Simon Baker. To view the original post in full, click here.

In the software world, budgets are mostly about headcount and capital expenditure. Headcount is managed by cost per unit, where a unit is a person considered to be more or less a uniform resource capable of producing fixed output. On a cost per unit basis maybe 100 people offshore are cheaper than 10 onshore. But in my experience, more people means more waste. The hidden costs in remote working don’t seem to factor into the overall calculations that inform executive decisions to offshore. These hidden costs include increased coordination and transaction costs incurred by having to work harder to keep things moving forward in unison. Plus there are likely costs from increased rework resulting from poorer quality of communications. Collocation makes a big difference for me because I want to experience the chemistry of face-to-face interactions. Nevertheless, distributed teams can work. Look at 37signals. It’s more about having people with passion and capability on the team, wherever they may be, rather than just units who tick the boxes on a skills matrix. Ritual budgeting Budgeting has become such a ritual I wonder if managers think it gives them operational control of everything going on? The longer a budgeting exercise goes on, the more it appears to be a game about guessing the number in some finance head rather than designing a suitable financial package based on engineering reality. I do wonder if some people get lulled into a false sense of security because they believe everything is safely under control as long as the budget is burning at the predicted rate, when actually this frame of mind might be taking attention away from mitigating the real risks. Don’t get me wrong - having a budget is important. It makes total sense to fix an amount of money to spend but managing activities from a budget perspective just fixes attention on costs. Looking at costs without looking at the benefits realized provides only part of the picture. It’s easy to run a project until there’s no money left and declare it a success because it didn’t go over budget. But what value did it actually deliver? How do we truly know it was a success? Are the delivered benefits real or imaginary? In conventional organizations, the financial controllers are far away from the project teams. I’ve got to question how effective the ongoing assessment of delivered benefits actually is in this setup. I’ve worked in a few places where benefits analysis doesn’t happen, or it happens too late to stop budget being wasted. I’ve worked in a lot of places where the benefits realized were as fictitious as the original projections in the business case. Someone has to validate the benefits are real. Treat costs as investment It’s not easy to run a project that consistently delivers benefits more valuable than the money spent. That’s why I believe costs should be managed as investment. This way costs get managed implicitly, focus is on generating value, and with continuous delivery it’s possible to validate assumptions and keep closing the loop on the business case to determine whether investment should continue.

2 Responses to “Managing costs provides a false sense of security”

  1. Kelly Waters says:

    Great post Simon. I don’t know if you’ve ever come across any of the material or books on Beyond Budgeting? I think you’d like it. I can particularly recommend the book Implementing Beyond Budgeting by Bjartes Bogsnes. He recently presented at the ThoughtWorks Live event and he was great, he has a really great story about the stupidity of traditional budgeting and how he undid it all at one of the largest companies in Skandanavia!

  2. Simon Baker says:

    Thanks Kelly. I’ve got the book but not read it yet. I’m looking forward to it though.

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