In today's global and disruptive business markets, not making room for innovation in your budgets can be one of the most expensive business mistakes you make. Here's how the most successful companies build room in their budgeting processes for innovation.
Are you budgeting for innovation?
To get started, think through these basic questions to figure out if your company is structured to capitalized on new ideas and innovation.
- If a new business idea or model came up between your annual budget cycles, how quickly would you be able to respond?
- How many new ideas that are tagged for future consideration end up just sitting on the shelf?
- Are you fully adopting or exploring your R&D finds, or are you too often limited by budget or strategic priorities?
- How long and how much does it take your company to capture and validate ideas?
- How much is your company investing on new ideas across your entire portfolio?
- Who is creating the new ideas in your company—is it focused around a few people or departments, or is it a company-wide initiative?
Finally, what's the failure rate of new ideas? If you're focusing on innovation, a high percentage rate will actually be good!
Of course, there are many other aspects you can take into account to figure out if your company is geared for innovation, and all of these indicators can point to more opportunities than are currently being realized.
Where do most budgets fail?
When you're budgeting, you typically start with the basics: go through previous year costs, historic data, revenue and profit. You then add any new initiatives, sales pipeline and aspirations for a 12-month forecast. And then quarterly (or monthly), you check on those estimates to assess for any variances. Your final annual budget becomes one large estimate used across an organization to control spending and hold operational leaders to account. If you've taken any business administration and accounting classes, of course, you know that this is the standard taught practice. It's practical. And it makes sense.
But not for today's businesses.
Unfortunately, I find that this standard practice can be incredibly limiting when it comes to allocating for innovation. It can create a huge constraint in responsiveness, innovation and opportunity. And we all already know the reasons for that:
- Complex dependencies
- Competitive instincts between divisions
- Job insecurities associated with change
- Budget allocations and cycles that encourage excess spend to secure renewals in the next budget cycle
- Negative attention associated with an increasing budget
With all of these challenges in place because of the standard budget process, it can be incredibly difficult to make the room for innovation that it really needs to flourish. While predictable and repeatable budget processes are the most efficient, they're not helping modern companies keep up in the global market. Consider the constant stream of disruptive, emerging technologies. You'll quickly find that an operational budget process without any slack or room for innovation becomes the most expensive risk your company could take.
How can you make room for innovation in your budget process?
The highly successful companies of tomorrow will be those that develop a responsive budget process and adaptive management style that capitalizes on emerging technologies today. While creating the Lean Product Lifecycle playbook, my co-authors and I tackled the challenges associated with innovation in traditional management settings. We found that you can encourage innovation at your company by following these guidelines.
Invest in innovation, early on
It's simple obviously, but putting money in your budget towards innovation (and early) is the way towards combatting a stale business. We found that new innovations would only be seriously considered at the largest traditional businesses with three to five year projections in their early stages.
And while these may be sparks that could turn into great ideas or technologies, without the proper financial backing or fuel, these sparks don't turn into fires. Instead, many good innovations sit at the gate without any budget behind them or a decent business case made on their importance. Ideas that could breathe life into your company's future markets and product ranges sits, waiting, while financial backing is spent supporting less valuable investments.
Try new accounting and funding models
To find this funding for new initiatives and to combat organizational fatigue, we suggested using inspiration from a range of sources including:
- Innovation accounting
- VC funding models and management
- Beyond budgeting
- Agile development
- Lean startup models
Innovation accounting, in particular, challenges the standard linear growth patterns that many investments are measured again. Instead, this approach allows for a J-curve pattern of growth, which is more commonly seen in transformational innovation observations. Using this instead of the standard linear growth models can help you see the potential in new investments.
Additionally, a VC funding models encourages a diligent and active approach to killing bad or less lucrative ideas more quickly. Fund-like tactics allow for the development of iterative investments wherein idea validation and evidence pulls even more investments, thereby encouraging a doubling-down on successful bets. It's a fluid, more agile business model that rewards innovation and tackles many of the challenges facing traditional budgeting processes.
Invest in people who can spot (and explain) a good idea
Do you have people in your company who know how to take good potential ideas and translate them into great business cases? Employees who are trained in business case creation can help create the urgency a good idea really needs for budget priority.
Retire to innovate
Innovation is about failing often and failing fast. Many organizations with large product portfolios don't actually take an active approach when it comes to the second part of innovation: failure. You should be actively monitoring or seeking to retire products or components that don't meet expectations.
Not doing so can lock your budget in limited or fading initiatives. A lot of capital and effort is often invested in "good enough" operations that do keep the lights on, but if released, could be utilized for new business ideas, growth or innovation to ensure the continued success of your organization.
And actively managing your innovation investments shouldn't be a scary proposition, for you or anyone else at your company. Have clear performance triggers for end-of-life processes that encourage a holistic view of value. Create safety nets and processes beforehand to repurpose employees and assets where possible. Build innovation and change into the constant structure of your business.
Streamline your processes, encourage innovation, and reduce budgeting cycle times with an integrated, real-time performance management solution.
If you have your own guidelines to encourage continued innovation and growth at your organization please share with me on Twitter. I promise to tweet back.