As innovation leaders, our first internal response to the question is hopefully, “It depends”. For most companies, however, a clear and certain answer is elusive. Why? Here are three reasons.
REASON #1 INNOVATION IS NOT A COMMODITY
Commodities within the same category are priced relatively the same. Commoditized innovation is an oxymoron, yet many companies do not differentiate between the different types of innovation in which they invest. If considering all types of innovation then it would include everything from becoming more innovative in how legal documents are processed and stored, to app functionality, to new product development, to anything else that hits the financial statements. Some innovations are process related, driving out inefficiencies on the one hand and driving in more refined efficiencies on the other. There are innovations that are cost-driven, others that leverage core competencies and take advantage of opportunities, and some that are related to evolving the business model, just to name a few. Each type of innovation has different costs and investment requires. How can we decipher whether we’re spending enough on innovation if we don’t break it down by type?
REASON #2 SYSTEM FAILURE
Does your company have a method for identifying which projects and initiatives that win annual budgetary approval are innovation projects and which ones are not? If yours is like many companies, there is no criteria for what was an “innovation project”. If it is left up to the project leader, his/her input is subjective. Who doesn’t want to own an innovative project? This results in flawed data. Even if you have a tracking system, for the projects that are entered as “innovation”, is there direct budget tracking against the originally proposed budget request? Can managers quickly apprehend how much was spent on which innovation projects and the differences between actuals and estimated amounts?
REASON #3 WRONG QUESTION
How do we know what the right amount of innovation investment is? That’s where many organizations struggle asking the right question. The real question is:
What’s the value of innovation?
The answer depends on how a company defines “value”, and it is then a project-level evaluation, then the sum of all parts.
It is impossible to look at the percentage of revenue or dollars spent on innovation and determine whether it is the right number. It depends on combination of things: Dollars + Activity + Impact. Let’s say your organization had 52 legit innovation projects launch in 2020. Is that enough? Too much? Were they the right activities? They might have generating a great deal of activity, but might have had little impact. They might deliver a great deal of impact, but in non-strategic areas. Unfortunately, neither the total dollars spent on each project, the amount of activities to support it, nor its impact in terms of the value it created for the business are factors that companies capture collectively and measure collaboratively across the organization. For these companies, whatever number they might have come up with for their annual report, it would not have been accurate.
We know that Amazon out spends Wal-Mart in innovation. There have been similar comparisons in pharma, fintech, technology and even governments. While it is interesting, it is not very applicable because the cost of innovation in one industry may be 3 times that in another. Even if you knew that your direct competitor out-spends your company in innovation by 2x. Is that bad? Are you falling behind? Do all you can to avoid inquires like that. They are the wrong questions.
IN THE END, it’s not about the dollar amount or percent of revenue that is spent, it is all about the Value Of The Innovation. As innovation leaders we should be leading the way toward better understanding how our companies invest their resources on every innovation project by evaluating Dollar + Activity + Impact. The next question we need to be ready to answer is whether the sum of that equation is the right number? To be continued…