Organizations have a budget for everything. And the innovation budget is one of the most critical investments. If you want to stay ahead of the curve, you need to innovate continuously. An innovation budget provides you with the minimum resources you need to work on new ideas. Innovation can be risky. But with efficient innovation budget planning, you can minimize the risks and maximize the returns.
What Type of Innovation Budget will Work Best for You?
There are many types of innovation budgets, and the best one for your company depends on its size, industry, and business goals. We are listing the most common ones below:
Percentage of Revenue: This type of budget allocates a certain percentage of the company’s overall revenue to innovation initiatives. It usually fits companies of all sizes, as it ensures that innovation is always funded, even during tough economic times.
Fixed Amount: In this type of budget, companies set a fixed amount to spend on innovation each year. This works well for companies with limited resources because they can have better control over their expenditure.
Project-based Budget: As the name suggests, this type of budget focuses on specific innovation projects instead of an overall innovation program. This can be a good option for companies that have a specific goal in mind, such as developing a new product, solving a specific challenge, or entering a new market.
Venture Capital: Typically, this type of funding comes from external sources to finance high-risk projects with the potential for high rewards. If your company is looking to make radical changes or pursue disruptive technologies, venture capital can provide that extra boost.
How to Properly Plan Your Innovation Budget?
Some people may hold the opinion that innovation and budgeting are very distinct concepts. Innovation is all about taking risks and trying new things, while budgeting is all about being frugal and sticking to a plan. However, the truth is you cannot have one without the other. Innovation requires investment, and if you want your business to be successful, you need to be strategic about how you plan and utilize use your budget.
Here are a couple of tips for planning your budget most efficiently to boost your company’s innovation and enjoy better returns on investments (RoI):
Differentiation Vs. Integration
Differentiation means creating new products, services, or processes that are unique and offer value to customers. Whereas, integration connects different parts of your business to create a seamless customer experience. Both are important for corporate innovation, but you should prioritize them based on your innovation budget. If you have a big budget, you should, of course, invest in both. You can invest in research and development (R&D) to create new products, improve existing products, as well as integrate your different business functions. But when the budget is limited, it is advisable to focus on differentiation. Here, you will mainly be focusing on R&D. You can also differentiate your business by providing unique customer service or by creating new customer experiences.
Analyze Your R&D Capabilities
You should neither underestimate nor overestimate the resources needed for an innovation project. Underestimation can lead to insufficient utilization of resources. Whereas, overestimation can be disastrous — you will have a hard time reaching your revenue and profit targets. So, it is very important to analyze your R&D capabilities. If the analysis reveals that you are lacking, say, a particular technology, think about outsourcing it. This is where StartUs Insights’ startup scouting platform can come in handy. Leveraging our discovery platform covering over 2 million startups & scaleups, you can easily identify partners matching your requirements to accelerate your innovation projects.
Apart from implementing the above-mentioned strategies, here are a few simple questions that you need to discuss with your team while planning the innovation budget:
- What are your organization’s goals? What are the most important areas that you need to innovate to achieve those goals? Prioritize those areas and allocate a larger portion of your innovation budget to them.
- What are the risks associated with each innovation project? How likely are they to occur? How much would they cost if they did occur? This information will help you allocate your innovation budget across different activities.
- Who will be impacted by each innovation initiative? What are their concerns and needs? Stakeholder input can help you fine-tune your budget so that it meets the requirements of those who will be affected by your innovation plan.
Time to hear from you — as an innovation manager, what are the critical aspects that you keep in mind while planning your innovation budget? Get in touch & share your thoughts!