Budget Fit (Habemus Budget)

This week the Mexican government approved the federal budget for 2011. This got me thinking about innovation budgets in companies. You must budget what you value, what's the price on new business ideas?

For what I’ve talked to clients or potential clients, most of them agree with the strategic benefits of innovation and would like to venture in new projects. But of course, there is always the budget issue. How much should I spend in pursuing a new idea? As it is said, it can't be called a strategy until there are money allocation decisions involved. Most PYMES (small and medium companies which are the most important for Latin economies) have a “cero budget” methodology where first the idea is presented, and if it is good: “we’ll see if we can get the money.” It is a way of not compromising resources with the employees and keeping centralized control by the owners.

Other companies, especially medium size ones, have a “bucket” budget methodology, placing a budget to different departments or areas. Even with this methodology, most of the time it is not divided into smaller classifications, such as innovation. Some might think: “A budget for innovation? If innovation is making improvements then I would have an innovation budget for each area, production, marketing, etc.” There are a lot of ways to plan effective innovation budget control according to each company, not only R&D, and it is part of doing a proper diagnose. For some companies it is better to keep the “cero budget” approach while for others they might even have budgets and metrics according to types of innovation, such as incremental or radical innovations.

Whenever I ask a client about “how much budget have you considered for this project?”, most clients always reply “There is no budget.” or “I don’t have any money left in the budget”. It is a cultural business paradigm that if you tell an external company (or outsourced services) an initial budgetamount, then they will raise costs or provide services that will cover every single cent. In ChromaticWorks it’s quite the opposite; our services are focused on making the organization more profitable. But I can’t blame clients for this type of defensive mechanism. After a while of working with us, clients start to understand the importance of information transparency. Winning their trust is part of our job. Trust can only be gained by having security measures for sensible information ourselves, from financial aspects (such as the budget) to the new product or service ideas themselves.

Innovation budget does not only respond to the company’s financial state, but should be diagnoses according to the innovation strategy, policies and portfolio management. Make sure you integrate the creation of new forms of value into your budget or else you will find starting innovation management even harder. It is the tough first step.