CFOs, How Much Money Do You Need For A Good Innovation Program?


Innovation is relentlessly challenging and difficult— many corporations end up losing financial leverage, frustrating the manpower, and going nowhere. Corporations spend billions of money and energy annually to pursue innovation conquest but this huge spending would only generate more value for businesses if the innovation success rate were just a little higher. Yes?

There is no fixed amount of how much budget is needed to set aside for innovation initiatives. Obviously, budgeting for innovation program depends on where and to what extent a company is in its life-cycle. A technology giant company like Apple, for example, spent more than $8 billion last year on its R&D, which seems like a lot but it was only 3% of revenues. Yet, R&D don't yield quick returns and most of them could be a wastage.

On the other hand, a high-tech payments company, Square, spent only $46 million for its product development in 2012, and it was 24% of Square’s revenues. Instead of asking how much, you might want the CFOs to answer to “is there a way to increase the innovation rate without spending more?” This thorny question of how to fund innovation is more important to be catered, particularly if your organization is forever challenged to "do more with less".

A well-structured budgeting plan will be easily set aside if the innovation program is considered in these two bases: the innovation capacity and innovation ability.

Innovation capacity is the organization’s potential for doing the innovation. This is the stuff such as assets, resources, technology and manpower that are easy to buy, and that organizations is willing to spend to.

Most innovation investments, such as product improvement, manpower solutions, technological innovation, and research and development (R&D) traditionally aim at strengthening the organization’s innovation capacity.

Today, innovation capacity can be easily obtained by every corporations, small or multi-national, new or incumbent. Manpower can be hired through the sharing economy; technology can be rented by hour; finance can be sought; and assets can be bought. But capacity alone is insufficient to increase the innovation rate and create a significant value, regardless of how huge the capacity is.

That is where the innovation ability comes in. Innovation ability is an aspect of creating value, like new customer experiences, a revised service system, or new business models. An organization may increase its hiring and have many people providing innovation capacity, but may still struggle to increase its innovation ability, because the capacity by itself does not invent nor implement a new business model, an advanced service system or a better customer experience.

Let’s take Nokia during 2007-2010 as an example of a corporation with great innovation capacity. Globally know that Nokia offered technologically feature-rich mobile phones and in fact, Nokia is the first corporation that invented the smartphone. Nokia actually offered a touchscreen smartphone two years before the Apple.

However, Nokia tied itself to its Symbian operating system (OS) despite knowing its weaknesses in the consumer’s eyes. Although Nokia did have resources to develop a new operating system (OS), they chose to hang on with Symbian and as a result, Nokia became less favourable and unable to create new value.

The initiatives are taken differently in Apple. Technology advancements are the backbone for both companies, but Apple did a much better job connecting its technology to a service system delivering new customer experiences through a relevant business model. In Apple, outside developers were allowed to sell apps through its iTunes and the App Store in condition of 30% of the sales made by outside developers goes to Apple. The huge number of apps created provides customers with a vast selection of new customer experiences.

We have come to these conclusions that organizations should spend less on building the innovation’s capacity. To make success with innovation initiatives, corporations need to consider the innovation ability —the business model, customer experiences, and the service system— that become the value drivers.

In other words, even if your organization increases the manpower to work on innovation initiatives by 10% or even 20% — while at the same time, refinement are made internally — there is simply no valid ground to believe that the organization will create greater value. Even if it has new ideas, new technologies, new products, or new services, none of these will necessarily increase the organization’s innovation success rate unless innovation ability changes the value drivers.

If the two bases are well-grabbed, organization will have clearer picture of how much to set aside for the innovation program and the resources will be spent on the right kind of innovation initiatives.

Instead of spending too much money on attention-grabbing, shiny objects and straightforward activities like hiring new people, procuring new technologies, and buying more facilities, it is harder but better to change the design of a current service system, introduce new customer experiences, or build a better business model that grant higher investment return.

CFOs, do you know where to put your money now? :)

This article is part of our #innovationliteracy #celikinovasi educational insights from innovation coaching and development program for corporates internal innovation teams. Reach out to find out more about F.A.S.T. Innovation Coaching

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By Khairul Anwar

Keywords: Digital Transformation, Innovation, Leadership

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