How Should You Budget for Your Innovation Program?

October 27, 2017

In a recent Q&A email, a member of the Innovation Leader community asked the following question:

How have you budgeted for the launch of your innovation program? Was it based on a percent of revenue? What were the key “buckets”of spend? How did staffing evolve?

Below, we’ve summarized a few of the top answers.

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Zero-based, activity-based — Aerospace industry respondent “Year 1 was zero-based budgeting for the scale required to start the activities we proposed to begin in year 1. Year 2 is a combination of activity-based zero-based budgeting for the team, and ROM business cases for the long term business outcomes (opportunity size) given near-term learning value (replacement for revenue/earnings) and current year spend requirement for activities (cost) to deliver the learning value.”

Percent of net revenue — Software industry respondent “I’m allocating ~2 percent Net Revenue (~5 percent profits) to innovation growth initiatives.”

Business pull — Energy industry respondent “Apart from a small amount of corporate seed money to establish the facility, we budget our innovation program entirely by pull from our businesses.  We do not receive set (or % based) funding like other R&D elements, but rather must find the problems requiring innovation and internally ‘sell’ our ability to deliver solutions in order to fund projects.  This motivates our staff to use agile methodologies for frequent customer interactions and deliverable assessments and to stay closely aligned to functional needs to deliver value through innovation.  Our staffing mix and size are dependent on the needs and skill sets requested of us, budgeted based on estimated demand, and adjusted as needed based on actual demand.”

Make a “big guess” — Insurance industry respondent “We estimate people, contractors and general project needs.  Big guess.  Separate budget.  Managed at SVP level.”

Build the budget from the bottom up — Insurance industry respondent “Budgets are built from the bottom up.  After deciding on the who, what, and how, we will execute on the next year’s strategic objectives. We budget for staff labor (direct and indirect), external consultants to support specific initiatives (and maintain an outside in perspective), space costs, and other operating costs.  There are long-term revenue aspirations, but year-on-year performance will be measured on innovation metrics (still being worked through).”

Start small, build on business cases — Apparel industry respondent “We started with a small consulting budget and some headcount, with the understanding that we could go and ask for additional money based on showing a believable business case.”

Align budgeting with maturity — Real estate industry respondent “The budgeting will depend on how aligned and mature the organization is in incorporating innovation.

  • Just starting out – budgeting has to be project led. This is where the innovation team has to identify low hanging fruits, and demonstrate value as a top priority.
  • Engineering a movement – budgeting then will have to be program led. This will mean devoting some of the current budget for training, for other promotional activities, for product development, etc… into innovation.  The budget essentially serves the same cause, but in a different way, hence is not really an allocation of a % of the budget but how far one can push the boundary in changing the organization.
  • Innovation pipeline – the company is invested in an innovation pipeline strategically. Depending on the scale of the company, the amount of budget expressed as a percentage of top or bottom line will differ. However, my opinion is that the total budget be kept as lean as possible, as ballooning a cost center is not sustainable. The ideal situation is that any good POV should go back to the relevant business unit or spun off into a separate entity.”

Innovate budgeting beyond the launch phase — Telecommunications industry respondent: “In my experience the people who approve innovation budgets would like to see innovation even in how the budgeting is done and the underpinning assumptions are shared. Expectations management is very important in the launch phase as is stakeholders’ views of expected impact and relevance. It may be relatively easy to get funding for some media and social awareness activities and getting people involved in ideation…the challenge is what to do next, and that will influence innovation budgets beyond the launch phase. Celebrity guest speakers, inviting people to compose a company song, innovative incentives are examples of success stories.”

Treat it like a startup — Former food & beverage industry executive “Treat it like a start-up, going in for initial seed funding with a “back of the envelope” ROI and a strong innovation “score” (i.e. on key metrics important to the company).  Lay out a path to further defining the business case with a series of learning experiments to refine the proof of concept, and clear points of incremental funding needs.”

Based on projects and pillars — Food & beverage industry respondent “First off I should clarify that the scope of the program I am leading is focused on developing and adopting innovative information technology products and services for our company, while supporting and growing an ecosystem of startup companies and entrepreneurs in the regions where we have a significant footprint. This is our second “fiscal year” into this innovation program. The team is limited to one full time employee with the commitment to grow to two employees in year three, and three employees in year four. This is, providing results are positive and support from senior leadership continues in the next years. The team is augmented with resources from other areas, on a project basis. The budget proposal was aligned to supporting the main pillars of the program:

  • Capital to partner with incubator and accelerator programs and fund events and prizes
  • Capital to fund 3 proof-of-concepts and subsequent pilot projects with 3 startup companies
  • Capital for 2 or 3 events to support social impact programs involving technology in our region
  • Sponsorship of a regional data and analytics congress

Avoid budgets until you have inertia — Food & beverage industry respondent “We really didn’t plan or create budgets at all. The rationale for starting up was to determine if there was value in pursuing innovation and open-minded innovation. It was recognized that budgets and specific resourcing would create hurdles to get started so it was simply avoided. The department head simply formed a small “SWAT” type team (5 people not working 100% in the area) to start building the program.  All staff was from the same department (R&D). This prevented any slowdowns and allowed us to just simply get started. Of course this brought us to a point where real budgets and a more enterprise facing team were required but it couldn’t be used as a roadblock for us to get started (the initial inertia seems to be tough for many groups and we didn’t have that problem). We achieved the proof of concept of the program and have since graduated so to speak.

Become good friends with your Controller — Automotive industry respondent “It was by key buckets of spend. The original budget that we set aside for innovation a few years ago was significantly greater than what it is today – this is a result of a combination of things, but the major reason is that we didn’t have enough truly innovative projects/ideas/teams that would come forth to ask for it so that they could work on future innovations.  Additionally, we were not able to spend the funding on dedicated headcount to focus on innovation; at the time innovation was on-top of everything else that teammates had on their plates. Today, we are undergoing an enterprise-wide transformation and refocusing our innovation efforts and clearly highlighting staffing needs for the newly defined buckets/stages that we have laid out. One bit of advice for anyone in their early stages: become good friends with their Controller – make sure this individual clearly understands that innovation is different and has to be treated differently.  They can be an essential ally in finance/yearly budgeting conversations that can quickly turn into cost-savings hunts.”

Base it on strategy, and invest in the “enablers” — Consulting firm “It should not be based on a percentage of revenue… What it should actually be based on then – at least as your key starting point – is your strategy… what are the big strategic objectives coming out of your Innovation Strategy, and what sort of bandwidth – and thus resources, and thus funding – will be required to achieve those strategic objectives…Second to that is the reality of your operating budgets, which at some point are a function of your revenues.  And so somewhere along the way the two have to come together… either more has to be allocated to beefing up your pipeline, or your strategy has to be scaled back to reflect the reality of what your pipeline is in fact capable of…The biggest bucket, in my experience, is almost always the enablers the program requires.  Stuff like building and running an Innovation Lab, sending people to innovation training, running various engagement campaigns, supplying people with design or innovation management software tools, sending people to events, trying to facilitate Open Innovation activities, and so on.. all the things that actually enable the program to work…”

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