How to budget for innovation

How to budget for innovation cover

This week I just wanted to draw your attention to an old article on Harvard Business Review about budgeting in established companies for innovation.

Here, on average, is what they estimated they were currently spending: 85% of their resources on day-to-day operations 5% on incremental improvements that produced faster, cheaper, better sameness 5% on small sustaining innovations 5% on big, disruptive innovations When we asked the managers what a better proportion might be, their answers were: 75% on day-to-day operations 5% on incremental improvements 10% on sustaining innovations 10% on big, disruptive innovations.

Personally, I find this intuitive, because of asset allocation is part of my background in finance. In situations of partial randomness, like in the financial markets, the amount you allocate defines your expose to particular risks and profit drivers.

relative and absolute allocation matters when deciding a budget

You can’t control in advance whether an investment will go up, down, or sideways in value. But you can choose how much you allocate, both in relative and in absolute terms:

  • Relative: Relative to the budget as a whole, what % is allocated to each innovation initiative? Also, what is the relative pool of money allocated to each type of innovation?
  • Absolute: How much money are you putting in? In other words, are you ok if you lose 100% of it?

The big challenge really, with budgeting for innovation in established companies, is that it’s typically done on an annual basis. Whereas new product development occurs on a much shorter cycle time. That way you are making big decisions about funding without the benefit of market feedback and other considerations which are critical tactically.

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