In my previous article, Innovation for Long Term Sustainability, I explored how investing in innovation should be embedded into your enterprise planning process. You start by allocating a portion of your annual budget for investment in discretionary innovation candidates. I also shared a value framework that can be used to ensure that you are investing your available innovation budget in the initiatives that promise the greatest value, comprised of an assessment of financial worth, strategic alignment and risk of not realizing the promised value.
In this article, I’d like to explore how an organization can, through a shift in their current investment strategy, increase the proportion of their future annual budget to spend on innovation.
Aside from enjoying a larger overall annual investment budget, the most common way to redirect a greater proportion of your budget to discretionary candidates is to reduce the amount of committed non-discretionary spend – reducing the amount of budget required to “keep the lights on.” To do that, you’ll need to decrease your operating expenses through near-term investment strategies that lead to increased efficiency and cost savings over time.
A shift in investment focus from prioritizing short-term revenue realization to prioritizing future productivity gains will be required during your current investment cycle. Shifting your investment focus starts with making changes to your investment strategy. For example, your previous strategy may have been more focused on revenue growth, reflected in strategic objectives of near-term increased market share, gross revenue, or expansion into new markets. Instead, an investment strategy focused on productivity gains might include strategic objectives of optimizing your supply chain; reducing downtime; enhancing technology infrastructure and improving production efficiency.
Once you’ve landed on the right strategy and objectives to guide your increased investment in productivity, you will not need to make significant changes to the value framework (below). The value framework is surprisingly flexible and already offers ways to enable prioritized focus on certain types of investment candidates without the need to add additional value components, weight portions of the framework, or add additional investment categories.
Financial Worth: You will need to ensure that your Financial Worth measurement can capture the present value of an investment that may not create benefits for many years to come and includes operating cost and/or production cost savings in the future as quantifiable benefits. E.g., quantifying a reduction in annual operating costs, a reduction in the total cost of ownership or annual production costs. Ideally your organization’s business case approach would value a return on investment that spans beyond the typical 3-year costs and benefits model.
Strategic Alignment: The shift in priority will happen through measuring alignment and contribution to strategic objectives that are specifically targeted at reducing production costs and/or increasing productivity in your operations over time.
Risk Assessment: Add risk measures to your assessment that evaluate your corporate patience. That is the risk that your leadership, your shareholders, your board members have the commitment and enthusiasm required to sustain the expenditure on an initiative until the promised value is realized. Your organization will need a high tolerance for saying ‘no’ to near-term financial worth wins in favor of the longer-term benefits of increased productivity and reduced operating costs. Other appropriate risk considerations include organizational change management maturity and capability and the operational capability to adopt or integrate the requisite solutions.
Leveraging the Value Framework can help your company prioritize discretionary investment in productivity initiatives in the current investment cycle to create a financial foundation that not only improves ongoing operations through increased cost efficiencies and improved adaptability to changing market conditions and customer demands, but also frees up discretionary budget that can fuel more innovation in the future.
Lisa Gorman brings over 20 years of experience working with global organizations on more effective approaches for enterprise planning, and strategy execution through designing and leading large programs of change. Lisa is known for her ability to introduce the right mix of best practice methods applied with a practical, curious, and empathetic approach, and she has a proven track record in helping organizations make better, more transparent decisions on where to spend their next dollar, and executing transformations that deliver on those investments.
Lisa is currently in Starbucks working on the adoption of a new digital operating model, collaborating closely with enterprise planning, transformation, and finance teams to incorporate a complementary portfolio governance approach and funding model, grounded in the achievement of OKRS versus large annual programs.