When implementing Lean-Agile practices at scale, organizations quickly realize their push for agility conflicts with traditional budgeting and cost accounting practices. It’s challenging to truly achieve organizational agility without evolving these practices. Scaling Lean-Agile practices requires organizations to evolve the way progress is measured. Instead of focusing primarily on the completion of projects, many Lean and Agile teams choose to use a combination of KPIs (Key Performance Indicators) and OKRs (Objectives and Key Results) to measure the ongoing health of their processes and align efforts up and down the organizational hierarchy around the most important improvement opportunities.
Traditional project accounting practices tend to focus on compliance measures like schedule, scope, and budget – and milestones that monitor progress toward all the above. This is because the decision to fund a project presupposes its value. The project team is generally only asked to be concerned with getting the approved scope of work done in a timely manner somewhere close to the original cost estimate. Whether it was the right thing to do isn’t their concern. Whether it really produces value will only play out after their project team is complete.
Projects are fundamentally temporary and are measured accordingly. Any ongoing care the project team creates is either a) the responsibility of a separate operations or maintenance group and/or b) depends on the approval of a new project.
By contrast, Lean budgeting tends to view a business as a reasonably stable set of products (or services) that brings value to customers and a system of value streams through which it produces those products.
Each of those customer-facing products or (generally) internal value streams is enabled by a cross-functional group of people who use (ideally consistent) processes and systems to get their job done. Because these products or value streams are continuous, we tend to measure them by analyzing trends.
You can’t ask “What percent complete is the product or value stream?”. Why? Because as long as it makes sense to continue offering the product to customers there’s always more work to do.
Instead we ask:
- How much value did we generate this time period compared to last time period?
- How much of our overall capacity of people, money, equipment etc. did we consume to generate that value, again compared to previous time periods?
- What are the highest leverage opportunities to improve our people, processes, and systems to improve our customer value delivered relative to our capacity consumed?
Executives can and should monitor the effectiveness of products and value streams and hold their leaders accountable for the trends of value delivered relative to capacity consumed. They can and should identify key areas of improvement that will help align local improvement decisions with the strategy of the broader organizations. But they should delegate as much authority as possible to the product or value stream teams. Give them a lot of scope to decide for themselves how to improve their outcomes, especially as it concerns specific methods and tactics.
KPIs vs. OKRs
As organizations start to evolve the way they plan, budget, and fund they also must change the way they measure the delivery of value. In this changing world of work, measurement of products and value streams tend to break down into two fundamental categories of metrics: KPIs and OKRs. KPIs are the things we always measure to know whether our product or value stream is healthy and trending well given a level of investment. Like the dashboard of a car, the needles move up and down, but the same gauges are always there.
Let’s look at an example. An insurance company has three business units/portfolios: personal, business, and other. Within the personal portfolio there might be several value streams for different types of personal insurance policies that are issued in different ways. Let’s say auto insurance is one of them, and the company primarily issues these policies through online channels.
A linked set of KPIs for the auto insurance value stream could be:
- A number of site visits leads to
- A number of policy inquiries which leads to
- A number of policies issued which we can multiply by
- An average nominal revenue per policy which is adjusted by
- The percentage of policy holders who stay current on payments and
- The number of policy holders that renew.
These would be enduring metrics that are evaluated as trends that would tell us a) the health of the business in the market and b) whether we’re doing smart things with people, processes, and technologies to take advantage of the market opportunity.
By contrast, OKRs are temporary. We use them to focus the organization’s collective brainpower on the most important areas of change by setting medium goals in terms of results but delegating the decisions about the best approach to take down as close to the work and the customer as possible.
The OKR process is one way that mature Lean-Agile organizations approach setting, communicating, and monitoring goals on a regular basis. Defining and aligning around OKRs helps to link organizational and team goals in a hierarchical way to measurable outcomes.
Put simply, OKRs help to answer these two questions:
- Where do we want to focus improvement efforts?
- How will we measure whether our efforts are generating the right outcomes?
Defining Objectives and Key Results
Objectives should be: Ambitious, qualitative, actionable, and time bound. Objectives are simply what needs to be achieved, no more and no less. When properly defined, they’re, “… a vaccine against fuzzy thinking—and fuzzy execution.”
Key Results establish and monitor our progress against the Objective. Effective KRs are quantitative, time-bound, and help to make the Objective actionable. Most importantly, they are verifiable: They lay out specific, actionable requirements that the team (or individual) responsible for them either completes or doesn’t – giving team members a clear-cut way of knowing whether or not they’re making progress, and leadership a subjective way of assessing performance.
Where an objective can be long-lived (rolled over for a year or longer), Key Results evolve as the work progresses. Once they are all completed, the Objective is considered to be achieved.
Let’s go back to our auto insurance example above. Say we are unhappy with the average revenue per account, and we want to increase it. The objective for the auto insurance value stream could be: Increase the value of upsells per policy issued by 20% by the end of the year.
This objective is ambitious, qualitative, actionable, and time bound.
Key Results that would help us measure if this objective is on track could be:
- Increase average number of “riders” per policy (roadside assistance, loaner car, rapid repair guarantee, etc.) by 30%.
- Decrease average age of new policy holders (we have a hypothesis that younger people are easier to upsell, so we want to target them) by 5 years.
- Decrease time to underwrite policies by 1 week (we worry that our processing time could otherwise cause an issue with the new riders).
To get these results, the auto insurance value stream has to decompose the OKR to different functions within the value stream, and in Agile terms, this OKR could thus lead us to consider Epics and/or Features for the ART(s) aligned with this auto insurance value stream. Some of these Epics and/or Features could be implementing marketing campaigns, doing sales training, and (clearly) considering a change to the system to automatically upsell and reduce time to process.
You’ll notice that revenue isn’t listed as an example of a Key Result here. This is because revenue is typically viewed as a lagging indicator – not fast enough or accurate enough to determine the impact of any one specific change.
Why couple Lean budgeting and OKRs?
Lean budgeting focuses more on early indicators of customer satisfaction, which can come in the form of app downloads or trials, website traffic, app usage, specific feature usage, and in-app feedback (such as a pop-up that asks users for a Net Promoter Score). Direct customer feedback through social media engagement, focus groups, and other channels can also help assess the progress of any given initiative.
Unlike lagging indicators like revenue (which are difficult to attribute to specific events), these early indicators can be tied directly to specific events – for example, the addition of an in-app onboarding walkthrough sequence might result in increased usage of certain features or greater trial engagement. This data can be used to make informed, timely decisions during PIs, and should also be used to inform the creation and prioritization of future Lean business cases.
The use of Lean budgeting allows an organization to pivot faster and spend money where the business has the most impact – based on value stream, ART and/or team OKRs. Without the guidance of the OKR, the auto insurance value stream we used above may end up spending their funds on something that doesn’t deliver the intended value the business needs, and subsequently, if the organization is locked into traditional budgeting, they cannot quickly release funds to something more innovative and more in-line with what the market needs now.
To learn more about Lean budgeting, check out our eBook: 7 Stages to Lean Budgeting Success.