Exclusive Book Excerpt: Advice on Innovation Governance, Budgeting and Metrics

Aaron Proietti, author of “Today’s Innovator.”

Few people know more about the challenges of fostering change inside a large organization that Aaron Proietti, the former Chief Innovation Officer and head of the Marketing Innovation Lab at Transamerica, the Baltimore-based insurance giant.

Some of that knowledge has been distilled in several resources for other corporate innovators that Proietti has created in collaboration with Innovation Leader, and a great deal of it is captured in his new book, “Today’s Innovator: How to Create an Environment Where Innovation Thrives.”

In the book, Proietti talks about innovation not as an outcome or destination, but as a competency that can help an organization escape the pull of the status quo. “By treating innovation as a competency, rather than an outcome,” he writes, “innovation can be designed into the very fabric, or essence, of the organization to ensure it is contributing exactly what is required of it.”

In the book, Proietti defines four stages of innovation maturity, which come up in the excerpt below: Dysfunctional Maturity (lack of defined innovation objectives), Tentative Maturity (innovation is seen as important, but doesn’t yet permeate), Confident Maturity (innovation is consistently part of the plan), and Competent Mastery (there is no difference between “core” strategy and innovation strategy). The excerpt below is from a chapter that focuses on establishing systems of innovation.

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Innovation Governance

Unless a company is a superstar when it comes to managing innovation processes, it is foolish for innovation efforts to follow the same set of rules and requirements that govern all other business-as-usual decisions (yet many organizations will try to force-fit them in). In order to raise the organization’s innovation competency, attention must be paid to the design of the decision-making, budgeting, resource assignment, innovation accounting, metrics, and reporting, which comprise the innovation governance system.

Decision-Making Structures

Whether it’s bureaucracy, rigid decision rules, ineffective committees, or the endless series of prioritization meetings, there is likely some element of how your organization’s core governs its decision-making which has proven to be insufficient for your organization to achieve all of its objectives. Perhaps your organization has been favoring certainty over upside, or rigor over speed, or product improvements over product development. Whatever the limitations are, they must be understood in order to design the decision-making structure which will govern your innovation activity. These shortcomings can be difficult to discern, but the exercise can be made easier by comparing your innovation strategy roadmap to your existing decision-making system, to determine whether the types of outcomes your innovation strategy demands could pass through your decision filters in the time horizon prescribed, without undue burden on the innovators or decision-makers. Similarly, you can also compare your new aspirational value set to the values inherent in your current decision-making structures. There may be some aspirational values related to speed, decisiveness, nimbleness, etc. that are unmet by the structures currently in place.

The factors that must be considered when designing new decision-making structures include: what are the various types of decisions to be made, who should make what type of decision, how frequently decisions should be made, and what the various levels of decision authority might be (assuming, for instance, that higher risk decisions should require higher levels of authority). If some of your current structures are sufficient, it may be beneficial to leverage as many of them as possible to avoid having to train an entirely new set of behaviors.

Many organizations will choose to embed decision making directly into the innovation processes they use, eliminating the need for toggling between innovation processes and business-as-usual decision processes. This comes with the added benefit of allowing innovators to make decisions on their own, alleviating the decision-making bottleneck that is all-too-common in today’s complex organizations. By developing a set of screening criteria that can be used to predetermine whether a new idea, technology, product, or partner is aligned with the innovation strategy, innovators can then make their own decisions inside of an agreed-upon contextual framework. Screening criteria can be classified into categories such as Strategic Fit, Operational Fit, Brand Fit, Financial Fit, Consumer Fit, etc. The same screening criteria can be used to evaluate anything from raw ideas, to product concepts, to prototypes, well in advance of a periodic decision-making forum.

Other considerations in the design of decision-making structures include evaluating the different requirements of strategic vs. cultural vs. operational decisions, and determining how frequently the decision-making structures, themselves, will be measured for effectiveness and iterated.

“Today’s Innovator,” published January 2019.

The Innovation Budget

Despite what many innovators would like to believe, the money that an organization has available for the purpose of innovating is limited. As I always told my teams, “There is no magic pot of money at our disposal.” While there are ways to greatly limit the expense of innovation, it will cost money, and therefore require a budget, to innovate. In Dysfunctional or Tentative maturity organizations, the two earliest stages of maturity as I define them, the reality may be that there is no money budgeted for innovation, requiring trade-off decisions to be made. Inside a corporation, this funding might come from shutting down a product or business line that is no longer producing sufficient returns, redirecting money from an existing budget such as marketing or IT, or expense-reduction initiatives such as layoffs or cutbacks in operational spending.

Recognizing that there is organizational sacrifice involved in funding innovation, you should err on the side of asking for only as much budget you believe is required to achieve your next objectives. This may require setting your ego aside — there is no sense of managing a large innovation team in a fancy off-site studio office with teams of consultants and freelancers milling about if that is not what the organization requires of innovation. Don’t forget the critical question: What does the organization require from innovation in order to achieve its vision? If the answer to the critical question is unknown, then so, too, is the answer to the question of what budget does innovation require from the organization in order to achieve its vision?

The line items contained in an innovation budget will vary substantially by industry, company size, innovation strategy, and level of innovation maturity. Common categories include salary budget for full time employees dedicated to innovation, budget for part-time or freelance
employees, a consultant and vendor budget, a meeting and offsite budget, a travel and conference budget, a training budget, funds for subscriptions or software licenses, funds for technology research and development, a real estate budget for off-site laboratories or co-working spaces, and funds for new technology or equipment investments. Budgets must have decision-authority assignments to go along with it, as well as periodic budget review and forecasting cycles.

Innovation Accounting

Holding innovation to the same finance and accounting standards as the organization’s core can contribute significantly to innovation initiatives failing to gain traction. Innovation carries with it a degree of unmeasurable uncertainty that can make even the most risk-tolerant finance professionals uncomfortable. In the absence of establishing a common understanding and a work-around framework for dealing with innovation’s unmeasurables, the organization will look at innovation investments through the same lens as it looks at any investment. For instance, project funding decisions in the core may require demonstration that there is a high probability of the investment achieving a standard hurdle rate, or return on investment (ROI).

To be a successful innovator in a large organization, you must work closely with those who will measure and scrutinize innovation investments to develop an innovation accounting system which fits the risk profile of your organization’s innovation strategy. For instance, it might be determined in your innovation strategy development exercise that the organization must take significant risks to produce breakthrough innovation in order to reinvent and reestablish itself. This type of moonshot innovation cannot possibly be forecast with year-by-year revenue and ROI projections; that type of forecasting rigor should not be required to fund initiatives classified that way. Adjustments must be made to account for uncertainty, potential upside, and long development time horizons. Without a doubt, innovation accounting is tricky business.

For organizations that are used to managing their finance and accounting in a particular manner, the challenge of measuring the effectiveness of an innovation strategy can be uncomfortable. Further complicating innovation accounting is that the line between what is “innovation” and what is “business as usual” is often blurred. Many innovation strategies include objectives focused on the core that require resources from an innovation department or laboratory. This will lead to application of dedicated innovation resources to core projects, or vice versa. Additionally, it will require hand-offs of ideas, concepts, prototypes, products or even new business lines from the dedicated innovation function back to to the core. Such handoffs can be lengthy and iterative, making it near impossible to understand which budget or group should be charged or given credit. What started as a seed of an idea in one part of the organization can end up being a successful program in a completely different area. This can lead to instances where the benefits of innovation are double-counted or represented in multiple sets of financial results and projections.

One of the best ways to overcome these myriad challenges is to enlist the technical experts found in your friendly finance and accounting departments to develop the new system of innovation accounting that will satisfy their requirements while considering the limitations of what is knowable. This will give finance a meaningful role in what might otherwise be an inaccessible, far-removed, or poorly understood innovation program.

Metrics and Reporting

An important aspect of governance and innovation accounting is the establishment of regular reporting or dashboarding to stakeholders on initiatives associated with the innovation strategy. The most effective reports are concise, consistent, and categorized, showing metrics of interest and the status of any in-flight initiatives. The best reports go beyond consideration of just the in-flight initiatives to present the work which remains to be done, or which is not happening, the whole of which is called the organization’s innovation pipeline. Further, the best reports present an organization-wide view, including initiatives that are executed by resources outside of the control of the report owner; and they demonstrate how this work is helping the organization achieve its vision, repeatedly justifying investment in innovation as an organization-wide competency.

Many organizations stuck in their status quo will expect innovation reporting and dashboarding to contain a standard battery of financial metrics such as costs, revenue projections, net present value, etc. While some of these are useful for directional purposes, such as to demonstrate the potential of the initiative, they can be wildly inaccurate. Tying any such projection to a project with a high degree of uncertainty can anchor decision-makers to the projections. Instead, it is useful to agree upon a set of metrics that matter for innovation initiatives…

For instance, for that moonshot-type initiative that we considered in the “Innovation Accounting” section above, maybe the most important metrics are input metrics such as how many full-time employees are involved, how many experts have been interviewed, how many ideas are under serious consideration, how big the marketplace opportunity might be. Input metrics can be valuable leading indicators which point to the potential of a given initiative without requiring the innovators to forecast a financial outcome in the absence of reliably predictive data.

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