You know that to deliver today’s business and achieve tomorrow’s goals, you need a portfolio of projects that improve your existing operations and a portfolio of innovation projects. You also know that to max out your odds of hitting tomorrow’s goals, you need a portfolio of different types of innovation projects.
You are also keenly aware that with limited resources, you can’t possibly fund every project.
So how do you make some of the most complex decisions that confront leaders?
Don’t fall into the trap of false choices.
It’s easy to feel like you need to decide between funding operations projects and innovation efforts. You don’t.
Projects that improve what you do today, like increasing efficiency and improving existing offerings, are fundamentally different than innovation projects that create something new. Trying to compare them is like trying to compare strawberries and broccoli – they’re fundamentally different, and people have strong feelings about both.
Do allocate resources to improvement AND innovation projects.
Most of your resources should go to improvement projects because there are what keep you in business and equal to (or ahead of) competitors. They’re also the lowest risk, so you can be confident of achieving your expected ROI.
Innovation projects are higher risk, and the number of resources they need is hard to predict, especially when they are in their earliest days or focused on something radically new and breakthrough.
Don’t give innovation projects all their resources at once.
Annual budgets make sense when you’re 99.9999% certain that the line item will be around for an entire year. But when you don’t know if a project will be around until next quarter, let alone next year, don’t give them all the resources upfront. Project teams will be tempted to front-load their spending and, if the project needs to end, it can be hard to quickly free up the resources to allocate them to a different project.
Do protect all innovation resources for an entire year.
Even if you have the excellent discipline to carve out an annual budget for innovation and dole it out in bite-sized chunks based on hitting key milestones, it can be hard to maintain that discipline. Over time, the funds allocated to innovation, but not specific projects, start to look like a piggy bank that you can “borrow” money from when your existing business needs to. And while your intentions may be good, borrowed money is never repaid and, as a result, isn’t available when it’s needed.
Don’t use the same criteria to evaluate every innovation project.
Every project needs a small initial investment – money and people to answer a question or explore a space to see if “there’s a there there.” But before allocating a single additional resource to an innovation project, you should be able to answer the following five questions:
- What is the problem we’re solving, and who has it?
- How can/will we solve this problem?
- Why should we solve this problem/create this solution (e.g., does this support our strategy and priorities or create a compelling and sustainable competitive advantage)?
- What results do we need/will we get?
- What is the next major milestone, and what is required to get there?
If these questions can’t be answered, more work needs to be done, or the effort must be canceled. But often, these questions can be answered, but additional resources aren’t allocated because they can’t be answered with the same depth, breadth, and certainty that later-stage innovation projects can.
Applying the same burden of proof to an early-stage project asking for $10,000 to conduct consumer research as you apply to a late-stage project asking for $10M to launch doesn’t protect you from making a mistake. It drains your innovation portfolio and “protects” you from growth.
Do evolve decision-making criteria as a project progresses and resource requests get bigger.
At every stage of its development, a project should be able to answer the five core questions above with increasing depth and greater confidence rooted in ever more concrete and quantifiable evidence.
For example, consider a project in the design phase (first draft of a solution) seeking a few thousand dollars to test a paper concept with customers. When asked, “What results do we need/will we get?” if the answer is “We believe we can generate $X revenue based on the following eight assumptions, all of which we find believable based on internal or external benchmarks.” If you agree, then give them the money.
When that same project reaches the De-Risk phase (in-market testing) and requests millions of dollars and dozens of people for launch, if the answer is the same, STOP everything immediately (and, honestly, it shouldn’t have gotten this far)! The answer in this phase should be a detailed P&L and NPV because you know more than you did back at Design, and you’re asking for more.
Resource allocation is complex, especially when you have limited resources and an abundance of very different but very attractive choices. But it can be easier with a bit of discipline and common sense.
What other tips and tricks do you use to make resources allocation decisions?