What data do we need for innovation budgeting?
“What data do we need for innovation budgeting?”
Darrell Velegol, PhD
2023dec07
Another in this series of “Innovation Opportunities”.
SITUATION: We have medium size client that budget $100s MM/yr for innovation. But after talking, they realize that they don’t estimate the right numbers. In a sense, they didn’t know how many numbers were on the roulette wheel, and what was the payoff for winning or loss for losing.
PROBLEM: What data do we need to budget for innovation or capital projects?
ROOT CAUSE: These investments are not seen as a type of “gambling”. They want their financial advisors to tell them how to place bets for retirement, but don’t apply the same thinking to their bets on capital or innovation projects.
IMPACT: In my experience, the difference between placing bets rationally versus by simple NPV or IRR measures one project at a time, can be 10% or more. If you’re betting $100 MM/year, that’s >$10 MM! Plus the lost customer satisfaction, the lost morale boost to your team from missing various winning projects, plus lost promotions for ambitious new directors, and more!
COACHING TIP: At the simplest level, for each project you need estimates of 1) the win ratio = anticipated present value profit / investment if you win, 2) the loss ratio = anticipated loss / investment if you lose (often = 1). 3) The probability of winning. 4) The anticipated time required to complete the project in weeks. The anticipated dollar estimates use present value over multiple years.
STRUGGLES BEFORE: Since these estimates were mostly missing, proper betting could not occur.
VICTORY AFTER: I can’t report victory yet. But I’m hopeful for them! It will be worth $MMs, and will be an asset that the company can use to improve their innovation, their company value, their profits,and their team morale. Imagine if you had an “innovation machine” where you knew the profits you would make when you put money into it!
To learn more, start with the 2021 IECR article “Gambling on Innovation” given at
https://www.linkedin.com/smart-links/AQGNZoNL8sivaA
