Budgeting for innovation

Where do CIOs get the dollars to support innovation projects? If innovation isn't planned, do CIOs regularly need to pass around the tin cup around or kill their existing projects and services?

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In the digital age, conceiving and then delivering innovation is critical. But beyond creativity, innovation requires stepped investment. So how do business leaders and their CIOs provide the kindling needed to succeed at innovation. This was the question that I posed recently to CIOs. I wanted to learn how they plan and budget for innovation. How do they ensure there are the dollars to move innovation into what Geoffrey Moore calls the transformation zone?

Do you budget for spending that is 'change the business' versus 'run the business'?

For many years, I had been told that CIOs have two budget spend categories. One is for running the business and the other is for changing the business. However, many CIOs don't think about their department's spend this way. Former CIO Jonna Young explained by saying "it varies by organization. It ranges from Innovation Centers of Excellence with defined budgets to informal skunkworks."

So, when there isn't an Innovation Center of Excellence, CIOs say they don't bucket their spend. They do, however, say they try to promote innovation through their project management processes and by encouraging teams to propose innovative strategies. These CIOs say it's a back and forth--a constant process towards improvement and unearthing new ideas that are valuable to the organization. CIOs in this camp stress innovation should be the output of all IT spend. They say that even the most run-the-business projects should fuel performance and empower new ideas. For these IT leaders, innovation occurs everywhere. For this reason, they don't define funds dedicated to innovation. If they have a new idea they think is worth investing in, they look for funding.

But for former CIO Isaac Sacolick establishing a competency center and innovation funding "can do three things to the organizations: 1) deliver meaningful proofs of concepts; 2) research new markets and customer requirements; and 3) provide the analytics needed to know what to invest in."

Is innovation spending a plug amount?

Here again, most CIOs said that they do not budget for innovation separately. These CIOs say most organizations should put innovation projects through a vetting and budgeting exercise just like other initiatives. To a degree this approach relies upon business leaders driving their folks to find better ways of doing their jobs. At this point, CIO David Seidl said, "creative folks who are innovating will find a way. When we find something and don't have budget for it, we always find ways to repurpose budget to make innovative changes happen. I think how well this gets executed depends upon having an 'it's worth doing' culture."

This means to me that innovation spend is reactive and gets largely done through tin cups, shadow IT, end of year funds, and staff experiments. CIO Paige Francis, however, suggests, "I have been cat-lawyer-eyeing the whole 'run transform grow' mantra for a long time. The idea of innovation spend is fun, but especially in a pandemic, innovation is supported by creative, smart reprioritizing and reallocating. In higher education, an innovation budget would be French for 'cut this budget first' even if we could defend it. Effective CIOs can drive innovation without a plug budget."

What percentage of innovation spend is dedicated to new stuff

Given movements like DevOps, CIOs do have as a goal for all innovation spend to be a continuous improvement of a scalable past investment. With this said, some believe that every once in a while, you have to cut bait and replace that past. The reason is that continuing innovations often become just enhancements.

CIO Sharon Pitt said at this point that her question is always "how can we repurpose existing resources to ensure that innovation continues to happen". She continued by saying, "it is critical that CIOs enable a culture of possibility." And clearly along the way it is important to enable what several CIOs referred to as 'permissionless innovation'. CIOs do see value in measuring new innovation versus continuing innovation. It is clearly important to remember that innovation isn't necessarily about producing business results within one budget cycle. With this, Professor Noah Barsky suggested that "similar to successful R&D functions, going from idea to implementation can benefit greatly from a well-disciplined (but not overly managed) and candid stage/gate approach."

Should organizations budget for innovation events such as hackathons?

Young suggests CIOs take a broader view upon hackathons. "They can be a marketing and talent attraction and retention tools as well as innovation pipeline. Investment dollars should be found (budgeted or not) for innovations that have promise. They should be packaged and sold just like any other good idea." Clearly it is important to remember that hackathons shouldn't be expensive. Unfortunately, many CIOs that do budget for them do not have them frequently because they fear disruption to the existing business plan.

However, smart CIOs ensure that hackathons are relatively frequent and well-funded because, in longer term, they pay for themselves. Clearly, if hackathons generate business value, it's worth finding ways to fund them. The problem again for some is innovation often is aimed at replacing something that exists, But CIOs should remember that a reasonable chunk of innovation expense can create savings or new business opportunities.

Do you budget for things that support greater business agility and innovation in innovation spend?

CIOs strongly agreed with this idea because it enables their organizations to effectively bake innovation in. Yet it is clear that few organizations budget directly for Tech Debt relief. It usually has highly specific named targets. Young says for example, "I've not seen tech debt elimination itself in innovation budgets, however if debt-eradication often comes about as a result of innovation implementation. And this often can be an explicit part of business case."

And even where CIOs say they don't have innovation spend as a category, they say they budget for supporting user agility in people, processes, and technology. Analyst Dion Hinchcliffe suggests "some business agility and innovation should go into the IT budget. But from my experience, this varies widely by CIO, CFO, organization, and industry."

Parting thoughts

To be honest, I was a bit surprised by how CIOs plan and budget for innovation. They clearly think more projects should have innovation built into them. This is important to recognize. But I think it makes sense for CIOs to do some planning for innovation. Personally, I would keep dollars in reserves and invest actively in hackathons and other innovation events that output new investment opportunities. And by being able to seed fund projects during a calendar year without cutting or passing the cup around, I believe shows CIOs to be even better stewards of technology investment dollars. But this, honestly, may just be me.