In today’s rapidly evolving business landscape, companies are constantly challenged to adapt quickly to changes in market dynamics, customer preferences, and technological advancements. Traditional funding models, particularly for capital and operational expenses, have often been criticized for their rigidity and inability to accommodate the Agility required for sustained competitiveness.
Our hypothesis, proven in several instances in the banking, manufacturing, and healthcare industries thus far, argues that aligning CapEx and OpEx funding with Agile principles is imperative for businesses to thrive in the modern era and leads to the simplification of funding, tax implication (depreciation, etc.) and reduction of cycles used to re-fund/re-classify enterprise-level initiatives and/or products.
Furthermore, organizations are exploring the need to create an enterprise product model to align strategy with products, facilitating finance to naturally fund product groups and thereby streamlining funding releases which could, in fact, increase speed to market.
Hallmarks of an Agile funding model
Enhanced flexibility and adaptability – market responsive
Agile funding models enable companies to allocate resources with a higher degree of flexibility in response to changing market conditions and customer needs. Unlike traditional budgeting processes, which are typically fixed for a fiscal year, Agile funding allows for real-time adjustments based on feedback and emerging opportunities. By aligning CapEx and OpEx funding with Agile methodologies, companies can pivot quickly to capitalize on new trends or address unforeseen challenges.
Improved innovation and speed to market – reaching outcomes faster
In today’s innovation-driven economy, speed is often the differentiator between success and failure – getting products into the hands of customers faster will result in a quicker feedback loop. Agile funding empowers businesses to prioritize innovation and accelerate time-to-market for new/enhanced products and services. By adopting Agile principles in CapEx and OpEx allocation, companies can streamline decision-making processes, reduce bureaucratic hurdles, and foster a culture of experimentation and risk-taking.
Optimized resource options and allocation – flexible delivery models
Traditional funding models often lead to inefficient resource allocation, with significant portions of budgets tied up in long-term projects or outdated initiatives. We often see folks stuck in a defunct loop that is not delivering customer value and, therefore, not impacting the market or bottom-line profits.
Agile funding, on the other hand, promotes a more dynamic allocation of resources based on value delivery and ROI.
By aligning CapEx and OpEx funding with Agile frameworks such as Scrum or Kanban (and, ultimately, a product alignment way of working), companies can prioritize initiatives that deliver the greatest business value while minimizing waste and maximizing efficiency.
Increased stakeholder engagement
By leveraging an Agile way of working, we emphasize collaboration and transparency, both internally and with external stakeholders. By aligning CapEx and OpEx funding with ways of working, companies can foster greater alignment between business objectives and investment decisions. This transparency not only builds trust with investors and shareholders but also enables more effective communication and alignment across departments and teams. Additionally, when we align with top-line corporate strategy, we can start to measure where we are in the market as compared to promised goals and outcomes.
Reduction in risk – delivery and financial
In today’s volatile business environment, risk management is paramount – from both a profitability standpoint and an internal controls/audit lens.
Agile funding models promote a culture of risk mitigation and adaptation by encouraging incremental progress, frequent reassessment, and course correction as needed.
By aligning CapEx and OpEx funding with Agility, companies can better anticipate and respond to market disruptions, regulatory changes, and other external threats.
Aligning CapEx and OpEx funding models with Agile practices can streamline and simplify funding approval and utilization in several ways
Faster decision-making at all levels
Common funding practices have aligned with linear development in most aspects of the business.
By leveraging Agile practices, we promote iterative and incremental development, allowing for faster decision-making cycles.
By aligning funding models with Agile principles, companies can implement a more dynamic approval process that responds to changing project needs and market conditions.
Instead of lengthy budgeting cycles and approval hierarchies, Agile funding models empower teams to make decisions quickly and adaptively – increasing customer feedback cycles and getting outcomes/products in the hands of both internal and external customers faster.
Continuous prioritization
One of the hallmarks of leveraging Agile ways of working is the emphasis on continuous prioritization based on business value and customer feedback.
By aligning CapEx and OpEx funding with Agile practices, companies can establish a framework for ongoing evaluation and adjustment of funding priorities. This ensures that resources are allocated to the most valuable initiatives at any given time, maximizing the return on investment.
We also have the benefit of “failing faster” – determining what doesn’t work is just as important as understanding what does work.
Transparency and accountability – aligning with the Agile Manifesto
The Agile Manifesto set forth the principles of high visibility and accountability. When using Agile ways of working, we promote transparency and accountability throughout the organization.
By aligning funding models with these principles, companies can increase visibility into how funds are allocated and utilized from the strategy down to the team level and vice versa.
This transparency fosters trust among stakeholders and enables better decision-making regarding resource allocation and utilization as well as promoting a healthy culture of visibility for teams.
Incremental funding releases
Agile development typically involves delivering functionality in small, incremental releases. By aligning funding models with Agile practices, companies can adopt a similar approach to funding releases.
Instead of allocating large sums of money upfront for long-term projects, funds can be released incrementally based on project milestones and demonstrated value. This reduces financial risk and ensures that funding is aligned with actual project progress and outcomes. It also allows us to change direction if needed – we can quickly understand if a product or capability is not meeting the needs of customers or the market.
Empowerment of cross-functional teams
Agile ways of working typically empower cross-functional teams to make decisions and manage their own work while managing a very transparent roadmap.
By aligning funding models with Agile principles, companies can extend this empowerment to financial management. Teams can be given budgetary authority within defined parameters, allowing them to allocate funds according to project needs and priorities.
This decentralization of financial decision-making promotes agility and accountability at the team level. Additionally, Agile methodologies prioritize flexibility and adaptability in resource allocation.
By aligning CapEx and OpEx funding models with Agile practices, companies can more easily reallocate resources as project needs evolve. This flexibility enables organizations to respond quickly to changing market conditions, emerging opportunities, and unforeseen challenges, ensuring that resources are used effectively and efficiently.
General guidelines
The percentage of development resources (in this case, software) funded with CapEx and OpEx can vary depending on several factors, including the organization’s financial policies, regulatory requirements, accounting standards, and the nature of the software development projects.
Capital Expenditure (CapEx)
CapEx typically includes investments in long-term assets that provide future benefits to the organization. In software development, CapEx may cover expenditures related to the creation or acquisition of software assets that have enduring value beyond the current fiscal year.
Examples
With a focus on information technology and products, some typical CapEx categories include the following:
- Development of custom software and applications for internal use
- Development and launch of APIs that enable internal functions
- Acquisition and licensing of enterprise software products with significant costs (Oracle, SAP, MRPs, ERPs, etc.). This can also include the costs associated with research and selection of these products.
- Investing in infrastructure or platforms that support software development activities, such as servers, cloud services, or development tools such as JIRA Align, GITHUB, etc.
Instance of percentages capitalized (sample 75/25 model)
Typically, guidance will be provided by finance or audit as to the percentage of work available for capitalization. This, however, does not occur in a vacuum. Input from portfolio leaders, product leaders, and IT leaders is examined to determine the optimal percentage of capitalization.
In a particular client, analysis determined that teams were working on new products about 75% of the time and completing DevOps activities about 25% of the time. After review with our independent auditor, we determined that for the fiscal year, this would be the financial blend and we adjusted the budget and spending to reflect these allocations.
As organizations become more efficient, skills increase and teams mature, we typically see more time being dedicated to new development as coding practice become less “buggy,” which results in fewer break/fix activities. We can re-evaluate the blend of teams between CapEx and OpEx spend.
Operational Expenditure (OpEx)
OpEx typically covers day-to-day operating expenses necessary for running and supporting the business. In software development, OpEx may include ongoing costs associated with maintaining and operating software systems (on-prem or cloud), security, and management, as well as expenses related to personnel, utilities, and other operational activities.
Examples
With a focus on software/application development and support, some typical OpEx expenses include:
- Salaries and benefits for software engineers, testers, designers, and other folks involved in development and maintenance activities
- Subscription fees for software-as-a-service (SaaS) products or cloud services used in development and production environments
- Expenses related to software maintenance, support, and training
Instances of percentages
Similarly to CapEx, OpEx guidance should be coordinated with Finance, Audit Information Technology, and the business. The percentage of software development resources funded with OpEx could be substantial depending on where your organization is in the product lifecycle. This expense could cover ongoing operational expenses required to sustain development activities over time.
Summary
In conclusion, the alignment of CapEx and OpEx funding within Agile (and ultimately product) models offers numerous benefits for companies seeking to thrive in today’s fast-paced and uncertain business landscape.
By embracing Agility in resource allocation, decision-making, and stakeholder engagement, businesses can enhance their flexibility, innovation, efficiency, and resilience, ultimately driving sustainable growth and competitive advantage.
By aligning CapEx and OpEx funding models with Agile practices, we can streamline funding approval and utilization by promoting faster decision-making, continuous prioritization, transparency, accountability, incremental funding releases, flexibility in resource allocation, and empowerment of cross-functional teams.
All these practices lead to a more efficient business and delivery model, directly impacting the speed at which we can get products and services to our internal and external customers. The approach also enables companies to adapt more effectively to changing circumstances and deliver greater value to customers and stakeholders.
As a rule of thumb, organizations often aim to strike a balance between CapEx and OpEx funding based on factors such as financial objectives, tax considerations, risk management, and accounting treatment (GAAP). While there is no fixed percentage for CapEx and OpEx funding in software development, it’s essential for organizations to assess the specific needs of each initiative/strategy/product and allocate resources accordingly to ensure efficient and effective delivery of solutions and outcomes.
Additionally, consulting with financial experts and accounting professionals can help determine the most appropriate funding mix based on the organization’s goals and circumstances. Now is the time to take your Agile ways of working and apply it to your corporate funding process, model, and allocation.
