From Managing Past Costs to Rolling Forecasting – Development Portfolio Finances (part I)

Portfolio finances is one of my favorite topics – but also a complex and difficult one! I have had super interesting discussions about financial forecasting with many smart colleagues, and I will share some of my key learnings and practical tips here!

Managing development costs is important, but if we only focus on actuals, we always look into the past – and there is usually very little we can do for the past costs.

One of the good practices I would recommend for any development portfolio is financial forecasting. Forecasts are never 100% accurate, but they are the best understanding from the organization for the future costs (and benefits). There may be changes happening in different programs or projects – some work may progress faster than anticipated, and some may be delayed – this gives an opportunity in the portfolio level to take best use of available funding and for example initiate new prioritized work.

Different time horizons – from next month to long range planning

In the portfolio context, there are different time horizons to look into:

• How are we doing today – is the portfolio progressing according to our forecast? Do we have changes or delays, or an unused budget frame? What are the actuals compared to forecasts – are there significant differences?
• Current year – how is our forecast against our yearly frame? Do we have unused funding enabling a new high priority initiative?
• Planning for the next year – what are the portfolio level development initiatives for next year plans?
• Long range planning – what are the key development initiatives or themes for the next 5 years? Understanding the investment levels needed for future big initiatives is enough – no-one can give accurate forecasts for such a long time period.

Forecasting – different viewpoints

Finance processes in many companies have yearly cycles – whereas development portfolios are continuous by nature – projects start and end in the middle of the year, and some costs land to one year and others to the next year.

From the project viewpoint, the project typically has an approved budget including planned operating costs and capital investments. The cost may be divided into multiple years, but quite often finance process is looking for the annual cycles. If the project has changes or delays, also the cost may be pushed from one Calander year to another. These cases may cause headaches for financial controllers – if funding is reserved for one year, it may not be straightforward to push it to next year.

If the financial forecasting is focusing on current year or rolling five quarters, also some of the project costs may be out of the scope of financial process. However, from the portfolio viewpoint forecast (and business case) are needed for the whole entity and for the whole project duration. Both viewpoints – portfolio management and finance processes are important – it is just good to acknowledge, that sometimes there may be a bit different thinking and needs also for the forecasting.

In addition to projects, forecasting is a good practice also for value streams, continuous development teams, or other agile development teams. The agile way of budgeting may sometimes conflict with the standard finance processes many organizations have, but forecasting is also a good tool for agile teams – as a part of quarterly planning practices, it is good to check the forecast, too. And when updating future roadmaps, it is good to look at what would the impact into the future development forecasts.

Tips for projects and development teams – forecasting becomes easier over time!

• Creating the financial plan or forecast for the first time is usually difficult – especially at the beginning of the project, when scope and vendor contracts have not been defined yet.
• Create the first forecast with the team – this is a good opportunity for you to align together on your plans. Think forecasts from different viewpoints – include different vendor costs, but also consider internal work and other important elements.
• Think forecasts from the different viewpoints – include different vendor costs, but also consider internal work and other important elements, such as lisences.
• Accept also, that your forecast is not perfect, it is your best understanding at the moment!
• Next rounds of forecasting are already easier – previous forecast can be adjusted based on the new increased knowledge.
• Take forecasting into your routines – you could look into the forecast for example once a month in your core team meeting.

Tips for portfolio management and finance controllers – support the teams with forecasting, especially when getting started!

• What is the correct level of detail in forecasting for your organization and doable with your development teams? Too detailed forecasting may be difficult to introduce and manage in a long run.
• What is the correct cadence for your organization? Many organizations have quarterly or monthly cycles.
• Do you first focus on external cost forecasting, or include also internal work? Do you take a financial approach for internal work or plan for future FTEs?
• If development forecasting is new to your organization, accept, that it takes couple of forecasting rounds for organization to learn. Forecast accuracy improves over time, when development teams become familiar with the practice!
• At the beginning, help and support teams – people want to do good work, but they often need advice. If and when challenges are identified during the forecasting, take these as learning opportunity as an organization.
• Forecasts change over time – important to have regular checkpoints (e.g. monthly or quarterly). Regular cadence and friendly reminders to update forecasts help busy development teams to do the forecasting on time. Forecasts will not be useful if they are not updated systematically.
• Forecasting is a great tool for managing project or program finances, but also at portfolio or business unit level – if some projects or programs are delayed there may be opportunity initiate new prioritized projects – to take best use of available funding. Many organizations have quarterly forecasting cycles – quarterly cycles are also a great fit for portfolio level decision making. More about quarterly portfolio reviews here: Time for A Quarterly Portfolio Review?
• Also consolidated view of development portfolio forecasts in enterprise level gives an opportunity to see the big picture and do planning and prioritization across portfolios to ensure best use of capacity and ensure smooth execution for the most important initiatives.
• Portfolio management or financial planning tools provide also great support for managing different time horizons, rolling up via portfolio hierarchies, and managing different versions – but you can also start with simple tools, such as excels or SharePoint.
• Look into consolidated portfolio forecast carefully – typically development teams tend to be optimistic at the beginning of the year on all the development planned for the year and sometimes costs are moving towards the end of the year. If you notice something like this, discuss the teams, are they committed to all of the work with the remaining time, or should the forecast be updated.
• Instead of looking strictly at annual cycles, a rolling forecast typically fits better for development. Would this approach be good for your organization, too?
• This post was focusing on forecasting of development costs, but equally important are also expected benefits and development impact on run costs. This will be covered in the future blog posts!

I hope this helps, and I would love to hear your tips or viewpoints, too!

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