Running the day-to-day should never come at the expense of planning for the future. While organizations no doubt focus on their daily operational budgets, innovation budgets are often underfunded and overlooked. Deciding which emerging technologies are worth the investment and getting teams on board with change are often the hardest parts of any digital transformation leader's job.
That's why those leaders should work to have a holistic strategy to deal with the risks that come along with any transformative initiative. Funds dedicated to innovation initiatives should be a critical component of any solid business and technology strategy as, without it, transformative projects can easily fall by the wayside.
But is your budget focused on the right areas? Harvard Business Review wrote that most innovation projects fail because money is spent on activities like hiring new people, gaining new technologies, and buying more facilities. Spending like that may grab attention, but do they put you in a position for success? There is no time like the present to take a closer look at why either creating an innovation budget or taking a deeper look at the one you currently have makes sense for you.
A Foundation to Driving Positive Change
The world of business is littered with once-successful organizations that stuck with what worked in the past and the present with no eye toward the future. Nokia is a perfect example of a corporation that was left out in the cold when competitors emerged with new technologies and became more effective in adapting to changing market dynamics. The one-time top mobile phone maker sat on the sidelines for too long while Apple and Android cornered the smartphone market.
Considering these realities, having an innovation budget already in place allows an organization to act quickly and implement new technologies and processes to keep up with the times. It also gives an organization the ability to be light on its feet when the winds of change begin blowing it in its direction. That's exemplified in this analysis of the role innovation played for YouTube long before Google came along to pay $1.65 billion for the company.
Innovation isn't restricted to just investing in a new idea. Innovation budgeting can be anything from allocating funding to new products, process innovation, or developing new strategies to gain a competitive edge. The numbers show that innovation budgets are linked to higher revenue and customer value. According to a study by Development Dimensions International, innovative companies report higher sales and profits from new products compared to less innovative peers, with a difference of about 48 percent versus 21 percent.
The Key to Risk Management
A 2019 survey from McKinsey found that companies that were strong innovators extended their lead over their competition. That same survey found that while executives said they put an emphasis on innovation, fewer than 25 percent said they got involved in setting innovation budgets. This is a significant disconnect considering legacy systems become inefficient over time and there is a dire need for innovation for a business to survive.
Innovation will always come with a certain level of risk, as with any type of change-management strategy. That doesn't mean anyone should be putting off plans for change, though planning for the future of your organization should also not mean putting your today at risk. Balancing the risk and reward is critical, and this is where having an innovation budget can help.
Having dedicated funds set aside makes it easier for companies to make small, incremental investments to see whether an emerging technology is worth it, before going in full force and making a larger investment. Of course, success metrics and key performance indicators (KPIs) need to be in place to measure if your innovation budgeting and investments are paying off.
Helping You Manage Technology Investments
Once you decide and are committed to driving change, the logical next step is to assess which tools and technologies you need to invest in to enable a successful transformation. This is where leaders often fall into analysis paralysis due to the perceived risks or the sheer number of options on the market.
Having an innovation budget in place is the key to setting some guide rails to ease the decision making process. It will help answer key questions such as how much money you have to work with and how you can best allocate the resources for the most return.
Once you have the key questions answered, you will want to clearly identify the problems you want to address and assess which solutions should deliver optimal value to your organization through better customer experience, improved productivity, and higher operating efficiency. Since the technology investment will have long-term impacts on your business's financials, it should align well with your strategic plan and be scalable. Maintaining the budget helps you keep an eye on the big picture as you assess your needs.
No matter how well you plan an innovation budget, as a leader, you need to be prepared for resistance within your organization. Again, innovation equals risk. Adding new technologies within your organization can also result in a complex network of old and new that will take time to integrate. However, planning ahead, communicating those plans clearly, and managing change effectively can ease any concerns and put you on a path to success. In the words of famous organizational theorist Geoffrey A. Moore, early adopters are all innovation investors, and investing in your business's future today can set it up for success for a very long time.