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3 Signs Your Innovation Budget Needs a New Approach

Business.com / Last Modified: April 17, 2018
Image credit: lOvE lOvE/Shutterstock

Innovation output is not as simple as spending more money. It's about agile planning, frequent failure and regular reallocation of resources. Here's how to set your pricing accordingly.

Nothing says, "Let's try something new" quite like a six-figure loss.

We were working with a major fashion retailer on a fixed-fee, fixed-scope project. Even as feature creep set in, we pushed on. We wanted to do right by our client. But delivering something we were proud of meant blowing a department store-sized hole in our budget.

There's a reason we don't do those projects anymore. Inevitably, we overwork ourselves or the client overpays. Neither is the sort of outcome that strengthens relationships, so we needed a better innovation pricing model. After a little trial and error, we found it in a weekly team-based structure that provides exceptional results without turning our talented team members into pennies-per-hour workhorses.

Nodding your head because you've struggled with innovation spending? Don't wait for a six-figure mistake. Start by working backward, thinking through your innovation challenges and addressing them directly.

Problem No. 1: Watching the grand plan fall apart

True innovations don't start as mega marketing gimmicks with a known cost. They happen slowly, by leaps and starts, through a series of experiments and failures. 

So while CMOs shouldn't have the reins of the innovation budget, at least 23 percent of them have wised up to the fact that innovation deserves an annual budget rather than ad hoc allocations. 

The issue is that, unlike tax burdens or equipment costs, innovation isn't predictable. In a dozen years' worth of studies, PricewaterhouseCoopers has yet to find any statistically significant link between research and development (i.e., innovation) spending and financial performance. The key to innovation, then, isn't necessarily spending a lot of money; it's having a budget explicitly for exploration and failure. 

So what's your company to do if it can't predict its innovation costs? Make a series of small bets. Plant the seeds of your most promising ideas, and see which take root. By setting up innovation committees or boards to review experiments and pilots, you can stay on top of project criteria and not let the budget turn into a runaway mess.

Problem No. 2: Struggling to save a dying solution

Forget what everyone taught you in school about getting an A every time. Even a behemoth like Amazon knows the inevitability of failure. Jeff Bezos mentioned it in his 2017 stakeholder letter when he noted it was important to “experiment patiently, accept failures.”

Rather than tether yourself to one single, beautiful solution, remember that about 95 percent of new products fail. If you predict a failure before it hits the market, you should consider yourself lucky. Every failure provides you with more knowledge tomorrow than you had today. If you’re flexible and nimble, you can move on the next time you recognize failure rather than try to make a failed solution fit into a tight budget.

Of course, teams often squirm at the idea of pulling the plug on their projects. They’ve likely been taught to just press on, even if the product is a waste of money and doesn’t work. This is the antithesis of innovation and agility.

Our motto is to fail fast. The faster you slaughter non-viable projects, the easier it becomes to pivot or tweak ones that show signs of viability. Remember: Innovation isn’t emotional; it’s practical. Holding on to dead weight only keeps you from rising.

Problem No. 3: Betting big on small features

Does your new product have all the bells and whistles? If so, stop and ask what purpose they serve. Remember, you are not the end user who may or may not want those features. Instead of focusing on features, take your cue from the venture capital world and give oxygen to what's blooming.

Entrepreneurs and investors operate leanly. They know big-bang innovation rarely ever works. Instead, they take small, smart steps toward a solution without worrying about nitty-gritty features. In contrast, enterprise teams are content to chew through budgets on the wrong things because they worry they won't receive the same monies the next year if they don't. Talk about wasteful! 

See your product or service from a scrappy, entrepreneurial viewpoint. Don't waste time on that obscure API or flashy layout. If users want it, they'll tell you during the prototyping phase. Spend where your product provides value, and innovation will follow.

Far too many firms don't connect the dots between their budgetary input and innovation output. It's not as simple as spending more money. The truth is, it's about agile planning, frequent failure, and regular reallocation of resources. The sooner your innovation budget accounts for those things, the better your balance sheet will look. 

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