Outcome-based allocation and outcome-based product funding are two different, but related investment concepts involved in driving optimal product portfolio decisions and orchestrating an effective product operating model.
This blog post will cover the what, why, and how to implement and optimize outcome-based resource allocation and outcome-based product funding.
Outcome-Based Allocation
One of the most influential factors in portfolio performance is asset allocation. In an effective product portfolio resource allocation is key due to its fungibility and immediacy.
A product portfolio can be viewed from many perspectives–as a product lineup, in market segments, or based on targeted outcomes. As such, you may establish clear allocation targets for each of these key vantage points.
Outcome-based allocation is about dedicating investments to a number of goals across the entire portfolio within a certain timeframe.
Why should companies adopt outcome-based allocation?
Product managers often invest several millions of dollars of resources each year on behalf of a company. A good product manager constantly faces the challenge of effective prioritization (while a not-so-good product manager simply reacts to requests or builds in a vacuum).
The root causes of prioritization challenges are:
- Lack of strategic context/global objectives that guide decisions
- And, even with global strategic goals, teams still struggle with competing goals
Melissa Perri emphasizes the role of strategic intent in guiding teams toward desired outcomes:
“An outcome-focused product leader does not mandate initiatives but instead provides strategic intents. The strategic intent points to the outcome the business wants the team to achieve.”
– Melissa Perri, CEO and Founder of ProduxLabs
Traditional prioritization methods like RICE or other scoring systems fall short if they aren’t anchored in strategic intent or outcomes, which evolve by design.
But even with clear goals, teams still face the dilemma of prioritizing amongst competing goals, e.g. the growth of new customers versus the retention of existing ones.
McKinsey research presents a solution for this challenge:
“Providing product and platform teams with reasonable autonomy requires a flexible but disciplined governance model. The first step is to define accountability to manage demand across different products.”
“The big product and platform shift: Five actions to get the transformation right,” McKinsey & Company
Outcome-based allocation offers a solution by providing product teams with strategic focus and the intended investment for each competing goal. This ultimately enables alignment, autonomy, and accountability of product teams.
How to implement outcome-based allocation?
The outcome-based resource allocation may achieve its intended benefits only when it’s adopted throughout the product operating model from strategic alignment, to roadmapping, to resource planning, and strategic monitoring. Here are the key operations associated with it:
- Set target allocation by executives for strategic goals or product portfolio OKRs, and set target allocation for each. This aligns the organization at the executive level during strategic planning.
- Evaluate planned allocation by product ops and product teams when performing portfolio planning and review planned allocation against a target. This is particularly needed when competing initiatives with cross-team needs, or competing business stakeholders’ requests come into play. This typically occurs in quarterly planning. (Check out more details for a step-by-step guide on conducting quarterly planning and OKR roadmapping.)
- Monitor reported allocation by product teams based on actual usage to maintain the target and/or adjust the scope to preserve product ROI promptly. Watch this video clip to see what Ryan Polk, CPO, Stack Overflow says about this topic.
- Adjust target allocation by executives based on outcomes
As you may see, the operating rhythm for effective outcome-based allocation is continuous, involving multiple roles and many data sources. That’s why world-class product teams orchestrate effective product operating models on a platform like Dragonboat – the context and data flows seamlessly to enable collaboration and decision-making across multiple time frames and roles.
Ready to get started? Book a demo today!
Outcome-Based Funding
While outcome-based allocation is about distributing resources for several goals across the entire portfolio, outcome-based product funding is about receiving allocated funds (or resources) on a single product or strategic initiative over time, based on achieving certain outcome milestones/metrics.
Why should companies adopt outcome-based product funding?
Product investments, like any investments, have risks. Outcome-based product funding is a way to incorporate continuous discovery within the bigger strategic bets.
Consider a scenario where $10 million is allocated for the development of a new AI product. There are three funding methods in the transition from strategy to execution (and outcomes):
- Full upfront funding: Entire allocated funding is provided at once, with the expectation of product launch upon completion.
- Deliverable-based funding: Funds are distributed in stages based on deliverable milestones, up to the allocated amount. For example, $5 million for shipping version 1, $2 million for version 2, and $3 million for product launch.
- Outcome Milestone Funding: Funding is tied to the achievement of specific outcome milestones. For instance, after releasing version 1, and achieving the desired product/customer/marketing objectives, decide whether to invest $2 million in version 2 or adjust the funding based on the progress towards the desired outcome.
As you may see, upfront full funding does not create the incentive to adjust based on outcomes and deliverable-based funding does not allow sufficient time to measure outcomes. Only outcome-based funding enables the mechanism to continuously evaluate the strategic validity to maximize portfolio return.
How to implement outcome-based funding for your product teams?
Implementing outcome-based product funding is an extension of outcome-based allocation described above.
Quincy Hunte, Global Transformation Product Leader at Amazon Web Services, shared his insights into Amazon’s approach to outcome-based funding on the Product Thinking podcast.
“If you need $1M funding, you’d not get them all. It’d be done in batches. (…) Has to have established KPIs that say by this period, I want to be able to meet XYZ metrics. This is how I’m going to do it, and this is the value I’m gonna deliver to the customer… if this does not happen, I’m gonna pivot.”
– Quincy Hunte, Global Transformation Product Leader at Amazon Web Services
Here is an outline of how to incorporate it into your product operating model:
- Set target allocation for the strategic intent, goal, or bet.
- Break down the initiative to measurable deliverables, e.g MVP, V1 – each with its own set of success metrics and how much you are willing to invest (within the overall budget).
- Prioritize features, based on their potential impacts on the outcomes. This could involve metrics like revenue impact, Market Opportunity Analysis and Response (MoAR), or you can develop a customized prioritization framework.
- Connect metrics or qualitative measures for each phase of the initiative.
- Evaluate the ROI of each milestone to guide whether you pause, pivot, or persevere with the approach.
Both outcome-based allocation and outcome-based funding are critical to winning product leaders to achieve the highest ROI – but they both require sophisticated collaboration and data. With a purpose-built product operations platform like Dragonboat, you may host all this data, and perform all these operations seamlessly in a central hub for high-quality decisions at speed amid complexity.
Ready to see it in action? Book a demo today!
