Is Your Budgeting Process Killing Innovation ?
Many if not nearly all businesses today go through the annual budgeting cycle. Looking back on the previous years costs, revenue and profit will give you a reflection point. This is often the measure your success or failures based on goals which are usually financial. With this as a baseline, many then proceed to plan the future based on new initiatives, historic data, sales pipelines and aspirations over a 12 months forecast. This can and is usually administered by regular inspection points to assess variance against the projection such as quarterly reviews.
To support financial planning, the creation of large operational or business plans are needed, which become contractual forecasts with reserved allocations. In other words, the annual budget becomes one large estimate across an organisation for one or more business units which attempt to control spend and hold operational leaders to account.
I recognise that this works for many very successful companies and is a standard, taught practice in business administration and accounting. The problem is, due to complex dependencies, coupled with the competitive nature and survival instinct of functions and business divisions, for many companies it creates a huge constraint in responsiveness, opportunity and innovation. Coupled with job insecurities associated to change, budget allocations and cycles can encourage excess spend to secure the potential renewal in the next budget cycle or the avoidance of negative attention associated for accruing budget.
Investing In Innovation And Emergence
In domains with little variance and mass repetition, predictable and repeatable processes and operational management can prove to be most efficient. However in our world today many companies are being disrupted as a result of globalisation and digital technologies. Having an operational budget forecast only without slack for emergence can be expensive. The successful companies of tomorrow will be those that have developed a responsiveness through adaptive management to capitalise on emergence today.
When forming the Lean Product Lifecycle, a common issue we faced sat within the perception of innovation and traditional management. New innovations would only be seriously considered with large traditional business cases with 3 – 5 year projections in their early stages. There is also a common perception that Innovation being only the capture, ideation and formation of new ideas or to put it another way, creating sparks.
Without financial backing and the appropriate opportunity growth lens though, consider how many of the these sparks don’t turn into fires as they are starved of fuel. This fuel which could be used to breath life in your companies future product range, is sat wasted across the organisation supporting less valuable investments. If you have an internal incubator, how many potential innovations sit at the gate as there is no budget for them or they don’t have a good enough quality business case? (Do you train people in business case creation to know what good looks like to translate great ideas into the business language?) Alternatively how many great ideas are met with the death pause where they are not the priority today?
To combat this we took inspiration from a range of sources which attempt to address this problem; Innovation Accounting, VC Funding Models/Fund Management, Beyond Budgeting, Agile, Lean Startup and more.
Innovation accounting challenges the linear growth patterns that traditional investments are measured success against. This approach allows for a J-Curve like pattern of emergence and growth which is common in transformational innovation observations. Measuring these trends using traditional management accounting methods, will fail to see potential as they measure linear financial growth.
Approaching this with a more fund like tactics to budgeting allows for the development of iterative investment. This is where idea validation and evidence pulls more investment, thereby encouraging a behaviour of doubling down on successful bets. On the contrary this forms a more fluid management style common in VC funds which results in a more diligent and active approach to killing bad or less lucrative ideas quick.
Retire To Innovate
Another area where potential is wasted is where investment is locked into limited or fading initiatives. Many with large product portfolios often don’t take an active approach to monitor or seek to retire products or substantial components of a product which didn’t meet expectations. Consequently there is a lot of capital and effort invested in keeping the lights on and ‘good enough’ operations, which if released could be utilised for new business ideas, growth or innovations to stretch out the life of your cash cows.
Actively managing your product portfolio across your business and having clear performance triggers with end of life processes will help encourage a more holistic view of value. However this must be supported by safety nets and processes to repurpose employees and assets where possible, as this can become very emotive if not managed well. By also not recognising the value in assets to be repurposed can be wasteful of switching initiatives transactionally.
How Constrained Is Your Innovation Capability?
If you’re wondering how well you are setup for governing innovation, there are a few simple questions to give you something to think about:
- Between your annual budget cycles, if a new business model or idea emerges which requires investment, how quick can you respond ? Or alternatively how many get parked for future consideration that end up sitting on the shelf?
- If you have internal R&D teams, how many ideas are not adopted or explored further because there is no budget available or they are not strategically aligned to priorities right now ?
- If you looked across your product portfolio, do you have more products/ideas in the market (Sustain) than are being worked on? Can you see all your products and clearly see which stage of the lifecycle they are in ? (Consider the shape of your funnel)
- How long and how much does it take to capture and validate ideas ?
- How much is your company investing on new ideas across your entire portfolio?
- Do ideas originate from just a few common people or areas ?
- How long does it take to submit a new idea when it’s conceived to get it heard and then potentially funded?
- What is the failure rate of new ideas? (A high percentage is good)
These are just some questions you could ask yourself to consider how your company is structured to potentially execute on new ideas. There are many symptoms which could surface as indicators that there is more potential in your company than currently realised.
If you have confronted similar or different challenges and have learnings to share, please feel free to comment below.