For innovation to succeed, how much money should you assign to an innovation effort?
The natural temptation is to get as much money as possible. Surely, the more money you have, the better the chance of getting decent innovation done? If you own a budget, you're in the driving seat, right?
Obviously, it is pretty hard to do much of anything if you have no money at all. But having a large budget is an error for new innovation teams because without fail they are certain to miss expectations substantially. Here is why.
When a team starts an innovation project, especially if it is more radical than incremental, the time between the moment the investment starts and when revenue arrives can be quite lengthy. New innovators, unfortunately, are in a race against time to prove they can make decent returns, and on average they have 18 months or less to prove to stakeholders they can do so. If, in that time, they have failed to deliver, their programs will usually be cancelled. Having a few very large projects that won't show quick results is little help.
The challenge of big budget innovation do not conclude here, because even when such innovations finally start to show returns, they will usually not be that big. It takes time for new things to ramp up to the point where the revenues they are generating are comparable to the scale of the mainline business.
If the innovators have been given a large budget, they will feel the pressure to demonstrate the returns they are getting are better than those available from traditional business investment. They need to demonstrate this because of the higher risk profile attached to innovation investments. Traditional business, on the other hand, is much more certain, and therefore carries a lower risk profile, and least from a capital perspective.
But because the big-budget innovation programme has to do things on a big scale (because they won't have the people or processes at the start to do anything else), there are almost always immediate comparisons to core business operations. An 80% failure rate looks terrible in this light.
It is far easier to start an innovation team with smaller amounts of money because you can get to a decent return number more easily. It isn't necessary to have a large number of things going on to do this. And it allows the team time to build systems and processes, which can support organic growth.
Determining how much money to give an innovation effort is a key task for management. There are free resources to help online, including James Gardner's ebook with a section on supervising the innovation budget.
Related Reading:
