Organization Culture and Innovation
Funding and Budgeting for Innovation
The process for establishing a funding source will differ depending on the company. For example, Allstate CIO, Suren Gupta, has described how a formal Innovation Council evaluates ideas and allocates funding. In other companies, if the innovation ties closely to a particular business unit, then funding may come from that group's budget. The actual size of the budget depends on whether a company lab is building the technology itself, partnering with other organizations, or acquiring a company, product, or talent. Amazon and Google have spent millions of dollars developing parcel delivery drones. Meanwhile, companies like UPS and Daimler AG have opted to partner with - and make strategic investments in - established drone makers. This lowers both the risk and the cost of innovation while still allowing the company to develop new capabilities. Regardless of how funding is established - or the size of the budget itself - it is critical to measure how much money was spent at each stage of the process: preparation (i.e. percentage of capital budget allocated to innovation projects), development (i.e. R&D spending at each phase of development the innovation process), and results (i.e. percentage of sales from innovation projects). As with the portfolio approach to general innovation metrics, the use of financial metrics across the innovation lifecycle reduces the focus on ROI, and too much focus on ROI can cripple innovative projects in the early stages.
When a company selects an innovative idea to pursue, management must determine where the money will come from to fund the innovation project. Management must also create a budget for the project, a team to work on the project, a timeline for development, and track long-term returns on investment. Companies evaluate innovative ideas and select the ideas that align with corporate strategy and have the best chance of success because the investment of resources (i.e., time, labour, money) for one innovative project may mean lost opportunities on other innovative projects. There are a limited number of resources, therefore, businesses cannot pursue all the innovative projects they may wish to at one time and must budget for the most promising projects. Opportunity costs are the potential benefits a business misses out on when choosing one alternative over another. Because opportunity costs are unseen by definition, they can be easily overlooked. Managers can make better decisions when choosing which innovation projects to pursue by understanding the potential missed opportunities when choosing one investment over another.