Financing and Budgets

Governance describes when the innovation budget is set and who decides on it. This article covers what happens to the money in between: where it comes from, how it reaches a Project Team and what it actually buys. Most companies finance innovation the way they finance everything else. A business case and a revenue forecast for the next three to ten years justify the investment, and the money is released once for the whole project. That logic fails for innovation work, because at the start nobody can know the figures the business case asks for. We take the perspective of an investor instead: the money sits in a reserved fund, and an idea gets the next instalment only when it passes the next gate of the End-to-End Innovation Process.

1. Sources of Financing

Five sources typically fuel innovation work. Each one comes with a price: whoever pays sets the agenda.

• Business lines: Each business line allocates a share of its annual budget to innovation. The money sits close to the customer and is easy to justify. The price: business lines fund what improves their own business and rarely what questions it. No business line funds its own cannibalisation for long.

• R&D budget: Innovation work draws on the existing research and development budget. That works well for technology-driven playgrounds. The price: R&D managers set the agenda, and business model innovation competes with product development for the same money – and usually loses.

• Central innovation budget: A central unit holds money of its own and funds projects across business units. It can back ideas that don’t belong to anybody yet. The price: the further the money sits from the business units, the harder the handover in Phase V becomes (see Organisational Structure).

• Own innovation revenue: A unit with its own P&L funds new projects from the revenue of earlier ones. That is the most independent source – and the slowest, because it needs successful businesses first.

• Investment fund: A dedicated fund provides risk capital for ideas that go to market as a start-up, usually in an independent legal entity. The price: the fund thinks like an investor and expects a return, not a contribution to the core business.

In practice, there is no “either or”. Most organisations combine two or three sources. Let’s say a business line funds the sprints for ideas in its own field, while a central budget finances the exploration projects and the ideas that sit between business units. Choose the combination deliberately and write it into the System Playbook – otherwise every new project reopens the question of who pays.

2. Funding in Stages

Uncertainty is highest at the start of an idea and falls with every phase. The money follows that curve: many small instalments early, few large ones late. Each instalment buys exactly one step and ends with a decision about the next one. A team doesn’t get a budget for the project – it gets a budget for the next answer.

Two rules make the table work. First, ITERATE is not a free extension. A second iteration is a new instalment, and the Project Sponsor releases it on the results of the first one at the Decide Workshop – not by default. Second, the money for all instalments sits in the innovation budget from the start of the year. Only its release is staged. No team should have to apply for money in the core business’s budget round halfway through a sprint.

Let’s say your innovation budget covers ten explorations, four deep dives and three sprints. After the first round, two explorations point to the same big opportunity and the rest to nothing much. You haven’t wasted eight explorations. You have bought the knowledge of where not to invest, for a fraction of what one implementation project costs. That is Dream Big, Act Small in financial terms.

3. What Innovation Work Costs

The largest cost of innovation work doesn’t show up on any invoice. It is the working time of the people in the Project Team. A budget that pays for external research but not for released people is a budget for part-time results. Calculate both parts:

• Internal time: Person-days of the Team Manager and every Team Member, multiplied by your internal day rate. The release of people – with names, share of working time and period – is part of the budget decision (see Leadership).

• Coaching: The Team Coach, internal or external, for the whole iteration including the preparation of the workshops.

• Research and experiments: Recruiting and incentives for interviews, market data, media budget for an Online Ad Campaign or a Landing Page, and support from a Research Expert.

• Design and prototyping: Material, tools and support from a Prototyping Expert wherever the team can’t build the prototype itself.

• Workshops: Rooms, travel and catering for the workshops of each iteration.

Let’s say a sprint team consists of a team manager and three team members. The team manager spends two and a half days a week on the project, each team member two days, over ten weeks. That makes 25 plus 60, or 85 person-days. At an internal rate of €800 a day, the team’s time is worth €68,000 – usually more than all external costs together. Put that figure next to the external budget in every proposal. Only then does everybody see what a sprint really costs, and what an unreleased team member really saves: nothing.

Agree who pays for what before the first project starts. The simplest rule: the money follows the decision right. Whoever decides that an idea moves into the next phase pays for that phase from their share of the innovation budget. Internal transfer prices only come into play where a unit has its own P&L (see Organisational Structure).

4. Financial Figures at the Right Time

Every phase needs financial figures – just not the same ones. Ask for a detailed business case too early and you get a spreadsheet of invented figures, plus a team that defends them instead of testing them (see Measurement of Success & Progress). Ask for it too late and you invest in an idea nobody has checked for money.

Note the direction. The figures get more precise because the knowledge does, not because someone asks for more precision. In the first iteration of a sprint, the Financial Sanity Check is rough. In later iterations, Step 5: Decide focuses more and more on willingness to pay, sales efficiency and operating costs.

5. Moving Money into Phase V

The most dangerous moment for a new business lies between a GO at the D-Day and the receiving unit’s next budget round. The team is ready, the sponsor has decided, and nobody has money for the next six months. Many validated ideas die in this “valley of death”. Three things keep them alive:

• Name the receiving unit early: Before the D-Day, not after it (see Organisational Structure). Only a unit that knows it will run the business can plan for it in its next budget round.

• Keep a bridge budget: The budget for implementation projects within the innovation budget (see Governance) bridges the gap until the receiving unit’s own planning takes over. Agree in advance when the receiving unit takes over the costs – as a date, not as “next year”.

• Choose the route to market with the money in mind: A handover to an existing business unit moves the costs into its plan. A new business unit needs a budget of its own. A start-up or a partnership can bring in external money – and with it external investors who want a say (see Phase V).

6. Q & A

• Our controlling wants a business case before any project starts. What do we do? Give them the table in section 4 and agree on it once. Controlling gets a business case – for ideas in Phase IV, where there is a Business Model to calculate. Before that, it gets something just as useful: the price of the next instalment and what it buys. Most controllers accept that quickly, because it limits the risk better than a forecast nobody believes.

• What happens to unspent innovation budget at the end of the year? Agree on that before the year starts, not in November. Ideally, unspent money stays in the fund for next year. If your accounting can’t carry it over, reallocate it within the innovation budget – to the next exploration or sprint in the Portfolio – and never back into the core business. An innovation budget that returns money gets cut next year.

• Should the project team manage its own budget? Yes, within its instalment. The Team Manager decides on external spend for research, experiments and prototypes up to an amount agreed in the Project Charter "Sprint". A team that needs the sponsor’s signature for a €300 interview incentive loses a week every time – and learns to plan the experiments it can get approved rather than the ones it needs.