Budget management poses significant challenges for Product Owners and Product Managers, especially those from engineering backgrounds lacking training in stakeholder collaboration and budget planning. Adapting to changing circumstances is tough but crucial, considering the broader company perspective.
Investors often rely on budget forecasts and plans, impacting hiring, marketing, tool procurement, and infrastructure changes. Maintaining employee wages and business sustainability requires precise budgeting and financial alignment, a critical aspect of professional product management.
Some individuals overly focus on uncertainties, claiming Agile principles hinder predictions. However, Agile isn’t about discarding planning; it’s about adapting. The challenge is aligning long-term planning with Agile principles.
Three Horizons Framework
The “Three Horizons Framework” from “The Alchemy of Growth” provides a structured approach for balancing short-term and long-term investments. It categorizes budget forecasts based on different return on investment periods.
Budgeting and the Three Horizons:
* Horizon 1: Business as Usual — Maintains current products for existing customers, generating significant profits.
* Horizon 2: Sustaining Innovation — Builds on existing products, potentially attracting competitors’ customers or upgrading technology.
* Horizon 3: Disruptive Innovation — Invests in bold, forward-looking ideas for long-term growth, exploring new markets or approaches.
A Strategic Budgeting Approach:
In my first book “The Product Samurai” I proposed a strategic approach to budgeting, which looked like this:
Align your budget process with product strategy and target markets, divided into four groups: current customers, competitors’ customers, prospective customers, and new market segments.
Consider Your Market Strategy:
1. Serving Current Customers: Prioritize customer satisfaction, cross-selling, upselling, and churn reduction, nurturing long-term relationships.
2. Attracting Competitor Customers: Reduce switching costs with strategies like free trials, bonuses, and aggressive marketing.
3. Engaging Prospective Customers: Allocate funds to customer orientation, product comparison, branding, and a streamlined buying process.
4. Entering New Market Segments: Explore innovative approaches to address similar problems in new markets.
Over time I have refined the Product Strategy part, and would probably break down the budget as follows:
Consider Your Product Strategy:
1. Maintaining the Status Quo: Handle minor changes, improvements, bug fixes, and maintenance. (Horizon 1.)
2. Adopting New Technology: Modernize your product by introducing new technology (Horizon 2.)
3. Enhancing the Product: Innovate within the existing product, adding features, solving customer problems (also Horizon 2.)
4. Launching a New Product: Take calculated risks by developing new products, potentially attracting both existing and new customers (Horizon 3.)
5. New Business Strategy: Shift your business strategy, exploring fresh opportunities, such as transitioning to pay-per-use models (also Horizon 3.)
To determine budget allocation, create a budget strategy table and involve customers and stakeholders in the discussion. Foster transparency and alignment across various perspectives, bridging the gap between management’s preference for new business strategies and customer-facing teams’ focus on current products.
We never said it was easy.