Innovation Budget Planning: 8 Things to Consider
As you start Innovation budget planning, here are eight things to consider:
When it comes to Innovation budget planning (and R&D), it is typically a laborious process that spans several months with business model canvases, business cases, proposals and pipeline discussions. I remember my inbox being flooded with documents, meeting requests and scientists pushing their research forward for my sponsorship. As Forbes magazine mentioned in an article last year “The presumption is that R&D spending is somehow connected to increased innovation, revenue growth and profits. However, leaders may be asking the wrong questions here. A focus on R&D spending might be a good way to gauge best practice within an industry, but it is not a measure of how innovative any company is. Having a great R&D process and achieving market success with the technologies we invent are two different things.” Nonetheless, budgets are the fact of corporate world and must be developed. Hopefully, I can impart some things to consider that are out of the norm.
Innovation Budget Planning Consideration #1: Understand Your Market
Know your market, what you’re good at and get outside help.
R&D needs to understand the marketplace they are competing in and where those markets are going. With increased velocity, we’ve seen innovation undergo a swift adoption of new models and solutions in the marketplace. A five-year plan may no longer hold true. Think about leveraging partnerships, acquisitions and scouting technology to determine if you can compress your R&D efforts by joining forces with the outside world. Partnering models can help companies avoid financial disaster. Proving out concepts and employing pop-up modeling can allow you to get to go/no-go decisions quickly. In today’s world speed to market is king. Look at megatrends in your ideas, look at the VC firms investing in the ideas your company has and the startups they are investing in. See if you can partner with them. It also validates if your idea is worthwhile. Look at Indiegogo, Kickstarter and quirky to see what’s trending. Articulate a picture of what your competitor could develop that would scare the heck out of your company. Use the Hollywood model when launching ideas. This is like a pop-up store concept. Use experimentation before you go full out on an idea.
This analysis helps to understand the ‘big picture’ and what is happening from the outside in, to your core technologies, the marketplace, and adjacent technologies that can impact your R&D efforts. So, budget to leverage technology that can help you innovate faster such as cyber scouting. In your due diligence of this technology make sure it is dynamic and includes brain swarming techniques. Here at Ezassi, we have a proprietary cyber scouting technology approach to running idea challenges or contests. We use our curated network of over one million expert solvers as well as an approach that utilizes search bot technology to create dynamic solver networks based on client-specific ideation requirements.
Innovation Budget Planning Consideration #2: Align Your R&D Strategy
Corporations do a great job of setting strategic goals, but I’m amazed at how few Innovation/R&D organizations take time to align their R&D/innovation strategy with their corporate strategy. If you want to get the CEO and senior team to buy-into your budgets, take the time to sync up the corporate strategy with a robust innovation strategy and include this in your budget presentation. This one is an easy budget item and only involves an investment in you and your team’s time. This is one you need to do in advance. You pick the timeline but in today’s world, I’d keep it at 3-5 years. Once it’s done keep it fluid as the corporate strategy changes. Ezassi provides a range consultative and planning services that can help with this alignment.
Innovation Budget Planning Consideration #3: Know Your R&D Capabilities
This goes hand in hand with #1 above. As you build out your budget, every business case highlighted should have a line item tied to the resources needed to get the job done. Underestimation can lead to an inefficient use of resources, but overestimation can be catastrophic to the successful completion of projects, meeting revenue and profit targets. If your analysis reveals shortcomings in your capabilities think about outsourcing your R&D or leveraging outside resources that turn up in your cyber scouting efforts. Many times, there is someone else in the world working in adjacent or direct spaces that can help or may already have a solution! Open innovation should be viewed as an extension of your R&D capabilities and resources. Ezassi provides a safe solution for Open Innovation technology.
Innovation Budget Planning Consideration #4: Include Outside Experts, Collaboration and Partnerships
Embrace the external ecosystem when innovating. It is rare in these days, that your R&D Innovation efforts use no external resources but, most R&D labs have an insular focus. As you build your project’s business case, make sure your budget considers possible outside collaboration costs, experts and costs associated with integrating the legal, technological and IP ownership complexities of such an alliance. Outside collaboration and partnership can future complicate your budget especially in corporations where IP is coveted. Picking the right tools to protect your company is very important.
Innovation Budget Planning Consideration #5: Risk and the 80/20 Rule
Remember the 80/20 rule? Well, it applies to innovation as well. Why can’t we change this? R&D labs traditionally focus on solving for technical risk only. Technical risk is about whether a company can create new technologies and make them work. In contrast, market risk is about whether customers will buy and use the product, even if the technology works. Innovation needs to solve for both! Increasing patentable technologies does not guarantee that a company is a successful innovative company. Clayton Christensen speaks about this in the article “Jobs to Be Done”. https://hbr.org/2016/09/know-your-customers-jobs-to-be-done
Frameworks can help to build sustainable innovation business models. I like this one because it focuses on what customers want using outcome driven innovation. I like it even more because the projects that run through these models are purported to be 5X more predictable and flip the 80/20 rule in terms of successful launch. So, take time to familiarize yourself with innovation business models and remember to include market risk in your business case.
Innovation Budget Planning Consideration #6: Plan a Realistic Budget — Don’t Break the Bank
Budgets are our best estimation of costs over years of experience and mixed with guesswork.
Expenditure on R&D projects is rarely confined to one fiscal year and it can be several years before a new product is finally manufactured. By breaking down the R&D budget into product-related investment streams, the link between revenue growth and R&D spend can be modeled. We did this using a two-page business case approach. As each business case is developed make sure it includes marketing costs for product commercialization. Many times, R&D departments leave this out but I feel it’s an important element of the total cost of product development to market. If you’re presenting this to senior management. they will appreciate that you’ve factored in commercialization. Last keep in mind that there’s a high likelihood that you may have either under or overestimated. So, keep it realistic. It’s a good idea to build in some contingencies with a realistic percentage. To validate your budget assumptions, include the total addressable market for this solution. Many corporations require profit and growth assumptions with each business case to validate go vs. no/go decisions.
Innovation Budget Planning Consideration #7: Going Global? Look at Outside Sources of Funding
Many companies practicing on a global scale fail to reach out the ministries of economic development in a country. They may be surprised to find that there is grant money that aligns with R&D efforts that could be run in a prototype within that country. Advise your R&D team with business cases that expand internationally to include analysis that considers economic development departments in each country. They usually have money and the responsibility to create jobs and draw in business for their country. Match up the research with their needs.
As companies undergo their budget planning, for each business case they are considering they should determine whether there outside sources of funding they can take advantage of.
Innovation Budget Planning Consideration #8: Plan
In my prior job, we always invested a third of our R&D budget on exploring initiatives. This is not atypical but we are now at a stage in innovation where big change is coming and it’s coming swiftly and from disparate directions.
Blockchain? Internet of Things? Artificial Intelligence and Machine Learning? Quantum Computing? Precision Medicine? Does this threaten our business? Sure, it does. Can you answer that your corporation has looked at these and where your goods and services fit into the future of these outside forces that can’t be stopped? How does this fit into your corporate strategy? What are you doing differently? As we prepare for the future how does the job to be done affect your customers? Make sure you’ve factored the future in your R&D budget.
As my final point, if you are not planning, you need to start now and remember when you do present your plan for next year adjust your presentation style. Technical people who speak technically to marketing is like speaking two different languages you need interpreters! Think about using storytelling to convey your plan.
Good luck this year and may the budget forces be with you!