Corporate innovation: let’s talk about money and how to spend less
Money talk: How much do you pay for an innovation team?
Let me give you a disclaimer first on the costs for innovation presented in the table below. I have seen multiple approaches to corporate innovation, but all in the Netherlands. Please take that into account when you compare the numbers and project them to your own area and sector.
The core principle for calculating the costs of an innovation team are the people in the team. For corporate innovations we have to take into account that employees are ‘fairly expensive’ and cannot be compared to start-up innovation teams with young people fresh out of school, working out of their parents’ garage.
Corporate salaries tend to be higher than in small and medium sized enterprises, resulting in higher salaries but also in higher markups for additional costs (140% up to 160% markup above salary depending on sector). Secondly, the employees that join innovation environments are usually not the youngest & cheapest people you attract and thus already are more expensive. Thirdly, any hired innovation professional from outside the company will charge a fair rate for their skills and experiences.
In this example, I calculated with € 7-10k per month as total cost of salary for 1 FTE in a corporate startup innovation project (although this is a conservative estimate, which you can double in many cases). Projecting this to a generic process for innovation (Lean startup approach, translated into several phases) and including additional costs along the way (think marketing, IT development) you get this table with the average costs per innovation phase for an ambitious project:
That’s a lot of money. And do check out the time frames.
Did you know that for startups to be able to show some success they need a runway of 18 months*? Venture Capitalist Frank Appeldoorn from Arches Capital shared this insight during an Ask Me Anything session at the ING Innovation Lab Amsterdam (August 2018).
The one big strategic decision you can make to spend less:
“When you commit to build, then also commit to support it for 12-18 months!”
When you plot the average costs cumulative over time (see graph below), you see clearly that the most important decision you can make if you want to spend less, is the decision to whether or not support the project to continue after the solution validation phase!
Be absolutely sure to continue to build something for the project that has validated its solution with customers. Because this is where there real investment comes in: once you start building (aka investing) the solution you basically also commit to support a runway of 12 – 18 months* otherwise the solution build will not have enough time to prove its value (serious risk: premature termination, wasting budget).
This is also the opportune moment to double check the strategic fit of the innovation project to the organizational goals. Will you be able to support it for the next 18 months internally without to much difficulty?
In any case when you still have doubts on the project you can better decide to temporarily extend the solution validation phase, instead of supporting an investment for (technical) development.
Don’t save on the idea pipeline up to validated solutions. Support many ideas to create new customer propositions. Your strategic challenge is to identify the right ones to invest in!
Organize your innovation budget accordingly in order to increase the rate of innovation success.
It’s strategically smart for you to fill your innovation portfolio with lots of projects addressing customer problems. But I advise you strongly to be extremely critical deciding which projects are eligible for serious development investments. If you commit, then commit for at least 12-18 months and make sure you reserve that budget!
Alternatively, you give the innovation budget to your corporate venturing department and let them buy more promising companies… :-). Or if you are daring, you implement a different investment model after the solution fit phase and challenge the team to continue as co-owners, thus effectively dropping your financial risks while building a highly motivated team.
Good luck and enjoy the process!
Ps. Below are some additional suggestions how you can reduce the monthly innovation burn rate:
During problem & solution validation:
- You can make the team smaller, but that will not have a big impact in the first phases.
- You can push for speed, reducing the runway. But you’ll need an experienced team to make the validation happen faster, otherwise you risk ‘we need more time’ requests (in other words: it’s worthwhile to invest in a high quality team, who can deliver results in shorter time).
- You can make sure you don’t code anything you may end throwing away. Match why customers will buy to reality before building anything: sell before you build
During build & pilot phase:
- You can stimulate low cost ‘MVP development’, with manual services and minimal (or no) code.
- Don’t add features, but know exactly how to deliver customer value. Build only what you need.
- Don’t only focus on building a product, make sure to continue the distribution strategy equally (sell and get more customers). I’ve written an article before on corporate innovation speed.
- You can exchange team members for developers.
- You can develop outside your organization, then incorporate the product when ready (additional speed)
* Venture Capitalist Frank Appeldoorn from Arches Capital shared this insight during an Ask Me Anything session at the ING Innovation Lab Amsterdam (August 2018).
This article is part of a series on corporate innovation. If you want to know more about how you can reduce your innovation costs and increase your innovation successes, check out the other stories here in the corporate innovators blog.