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Improve Your Budget Allocation Decision

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The fundamental driver of resource allocation in Decision Lens is resource scarcity that requires stakeholders to make trade-offs during budgeting. Resource optimization in Resource Balancer enables stakeholders to pursue a funding strategy that is most appropriate for their organizational goals and objectives. Basic funding strategies include:

  • A "Bang for the Buck" strategy attempts to maximize the amount of benefit (Priority Value) that can be "bought" for a given level of resources, adjusting for constraints other pools, periods and dependencies.
  • A "Strategic Value" strategy aims to maximize overall business and strategic value by emphasizing benefit (Priority Value) over resource efficiency. 
  • An "Equity" strategy that aims to create more equity in the distribution of resources across organizational units, opportunities, etc. while still pursuing resource efficiency.

The funding strategy for the budget decision is implemented through allocation scenarios. Before designing and building allocation scenarios, the Core Team should discuss potential funding strategies with stakeholders and agree upon the assumptions that should drive the resource allocation.

Orienting Stakeholders

Keep in mind that stakeholders experiencing Decision Lens for the first time may be a bit uncertain on how to apply the solution to the budget decision. While most people understand the concept of a benefit / cost analysis, many are not accustomed to having portfolio decisions framed using concepts like Priority Value (benefit score), Value ROI (benefit / cost ratio) and scenarios that optimize based on specific value drivers.

The Analyst can help take the lead in educating stakeholders on these concepts early in the process. The key points of stakeholder understanding should focus on:

  • The criteria model is the "benefit" model. It represents the operating performance and strategic benefits the stakeholders seek from the portfolio.
  • The Priority Value score represents a relative ranking of the benefits provided by each alternative, based on stakeholder priorities (criteria weights) and assessments of each alternative.
  • Optimization in Decision Lens can recommend a portfolio based on given funding levels and the key stakeholder assumptions for deriving value from investments. Ultimiately, stakeholders make the decision about which projects to fund.

Designing Funding Strategies

The default approach to resource optimization in Decision Lens is to maximize "bang for the buck." This means recommending a portfolio of projects that maximizes overall value. 

However, this "bang for buck" strategy may not be ideal for stakeholders, depending on the dynamics of the organization. There are several options for configuring budget allocation scenarios to reflect the primary objectives behind the budget decision. The Analyst should engage the stakeholder in a discussion of some key design discussion questions before building optimization scenarios:

  • What funding strategy is most relevant to the organization? Is the organizational emphasis more on strategic alignment and business value, or on resource efficiency and optimizing scarce resources?
  • How important is equity of distribution of resources across organizational entities? Should the budget allocation aim for a more equitable distribution of resources, or simply pursue the most efficient uses?
  • What is the range or distribution of alternative costs? Is there a broad range (10x multiple) between the lowest-cost alternatives and the highest cost alternatives?
  • Are certain projects scalable in terms of cost? Can projects be partially funded, and if so, is value generally commensurate with partial funding levels?
  • Does the organization aim to reallocate resources among major uses or asset portfolios? For example, in IT, is there a goal of optimizing funding in maintenance and operations to invest more in digital business transformation? If so, this is a good opportunity to leverage Impact Dashboards in Decision Lens.

The first point above might warrant a more detailed discussion with stakeholders. These are the key considerations for the decision team lead and Analyst as they discuss funding strategies with stakeholders

  • What is the overall performance focus of the portfolio? Improving the overall resource efficiency of the organization and improving return on investment? Or focusing on driving business and strategic value and aligning investments more with business needs?
  • Generally, how important is resource efficiency to the organization? Does the organization have a strong financial performance culture? Do managers and executives have concerns about how resources are being deployed and gaining visibility into their productivity?
  • Is there a sense that resource spending is high, yet not delivering business and strategic value? Is there a lack of visibility into enterprise-level strategy and how investments support the strategy? Does it seem that business units are pursuing individual “siloed” projects without a lot of strategic integration and coordination?

The answers to these questions should help clarify the appropriate funding strategies to present to stakeholders during Resource Allocation.

There are two basic funding strategies around which one can design resource allocation scenarios:

Fund by Value ROI

Use the Optimizer to have Decision Lens recommend a portfolio of projects that maximizes overall “bang for the buck.” Fund by Value ROI is, in effect, the default scenario in Decision Lens as the optimizer seeks to obtain the highest overall Portfolio Value Score given the level of resources and constraints in the scenario.

Fund by Priority Value

This strategy “buys” projects in order of overall benefit, or Priority Value score, proceeding down the ranked list until resources are depleted. This strategy emphasizes overall business and strategic benefit over resource efficiency.

To create a Fund by Priority Value scenario, simply sort the alternatives by Priority Value score in the Allocate Output Pools & Costs screen and force fund the alternatives in order of Priority Value until the resource pool(s) are exhausted.

 

The choice of funding strategy can vary based on the assumptions and organizational dynamics surrounding the budget decision. As noted above, the Core Team should be sure to discuss with the stakeholders the driving assumptions behind portfolio performance.

 

Fund by Priority Value

Fund by Value ROI

 

  • Driven by Priority Value (benefit) score
  • Ranks projects by Priority Value, moves down the list and “buys” projects until funding is depleted
  • Well suited in situations where strategic value and alignment are in question:
    • “Are we doing the right things?”
    • Business units pursuing siloed strategies that lack integration?
    • Executives feel that investments do not align with strategy?
    • Stakeholders want a more enterprise view of portfolio to see strategic linkage and value drivers?
    • Focus on improving overall competitiveness and execution?

 

  • Driven by Value ROI (benefit-cost ratio)
  • Approach is to rank projects by Value ROI and fund the highest “bang for buck” projects
  • Well suited in situations where greater resource efficiency and ROI is sought:
    • “Are we doing the most efficient things?”
    • Business units under pressure to reduce costs and find efficiencies?
    • Concerns that resource levels are not adequate, or not focused on right investments?
    • Stakeholders want to build a more robust business case for portfolio?
    • Focus on reducing costs or reallocating resources to other investments?

 

These two approaches represent opposing ends of a spectrum defined by the extent to which stakeholders feel the portfolio should be forced to “compete” for scarce resources.

 

In practice, many organizations want to achieve a blend of strategic alignment and resource efficiency. The Super User can design and run hybrid scenarios that blend elements of each strategy. These include:

Blended Fund by Priority Value / Value ROI

A blended hybrid approach allocates a portion of the resource budget (e.g. 50%) to the highest value projects, and then lets the Optimizer recommend the funding for the remainder of funding based on Value ROI. You can create this scenario by ranking projects by Priority Value, force funding the top performances until the target percentage (e.g. 50%) of the resource pool(s) are exhausted, and letting the Optimizer recommend how to allocate the remaining resources.

This funding strategy creates “compartmentalized competition” within segments of the portfolio. For example, the portfolio might contain a set of projects that are designed to cut operating costs, and the organization has a specific cost savings target in mind. These projects can be force funded to achieve the target (you would add an alternative metric of cost savings to display this), and allow the remainder of the projects to compete based on the other benefits sought.

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