Using a "budget pool" to reduce the cost of innovation

We have previously spoken about the value of using an innovation pipeline as part of of your innovation strategy.

This way, more projects can be tested at lower costs, with only the ones with validated potential getting further funding to continue.

But how do you actually reduce the costs of the projects in the first place?

This is where an innovation budget pool comes in.

In most traditional business cases in large companies, a project must plan out its potential total costs from start to finish.

For some types of projects that have previously been implemented, there can be a clear reference point as to how long they should take, how many resources they will need and how much they will cost. For example, implementing an existing software solution or building a two storey building have been done thousands of times and costs can be estimated based on experience.

However, innovation projects are almost impossible to plan in the same manner.

If you try to plan, there will undoubtedly be different hurdles you never imagined, and feedback from the market will never be exactly what you expected.

So how do you allocate budget to innovation projects if you cannot provide a business case?

You set up a budget pool for various project stages instead.

An innovation budget pool is the total amount of money and resources which a division of a company is given available to manage their innovation portfolio and pipeline. This will be split between all the projects at various stages of their lifecycle. Hence, all the resources are “pooled together” for all applicable projects to access, instead of each project getting a defined set of resources.

In the innovation pipeline, to validate stage 1, projects just need to validate if the real problem exists and if there is product-market fit. This can be done very quickly with a low budget, without even developing a prototype of the end-product or having an idea of what the solution should look like.

So all projects in Stage 1 can access a proportion of the total innovation pool allocated to Stage 1.

Stages 2 and 3 respectively require more and more resources, time and budget for each project. However, since a number of projects will be killed at the review Stage 1 gateway, there is proportionally more budget pool remaining for the surviving, validated projects entering Stages 2, and again fewer projects in Stage 3.

This way, instead of each project needing to develop an undoubtedly wrong business plan in advance, they only need to validate if they have successfully met the criteria for each stage of their journey.

This gives your company a much higher degree of flexibility in managing its own budget, while significantly reducing bureaucratic red tape.

Bio
Latest Posts

Nick Skillicorn

Chief Editor, Founder & CEO at Improvides Innovation Consulting

Creativity & Innovation expert: I help individuals and companies build their creativity and innovation capabilities, so you can develop the next breakthrough idea which customers love. Chief Editor of Ideatovalue.com and Founder / CEO of Improvides Innovation Consulting. Coach / Speaker / Author / TEDx Speaker / Voted as one of the most influential innovation bloggers.