Why can Innovation struggle to be taken seriously (and ultimately businesses fail) due to the way in which it is accounted for, in comparison to BAU? We look at the effects of management and accounting structures on how the concept of innovation is perceived and undertaken and make a case for a rethink of current Financial Structures.
Why, if Innovation is such a good idea, is it so hard to achieve?
It’s known that Innovation initiatives fail as often as they succeed, many who work on innovation initiatives feel the frustration of wishing to help a business to move forward, but being hindered by its structures and processes. It’s not for want of trying and never for lack of ideas; instead, the common theme in failed innovation has been the fact that incumbent business management processes make innovation incredibly hard to start, let alone, to flourish. Succeeding at Innovation is not just about investing enough new or additional money, it’s about breaking free of the financial structures which stop innovation happening in the first place.
Back to Basics: Defining Innovation and BAU
‘Innovation’ is simply moving forward as a business; the desire and intent to be able to design, sell and iterate new products and services, and to design, implement and evolve new ways of working. It is about better products for customers, and greater efficiency in delivery. And there are loads of ways to do either of those two things. So the job of innovation is to allow a business to try some ideas out, in order to find which new products or processes will work. When you look at it like that, it not only seems simple, but it to be the very essence of business itself. If you are not evolving and moving forward; impressing customers and improving efficiency, what on earth are you doing?
Business As Usual is what.
The term (abbreviated to BAU) is used by most businesses to describe ‘what they do every day to keep ticking over’. And the problem with it is that it is quantified, fixed and restricted. BAU was likely innovation once, but instead of being allowed to evolve, it was fixed at some point in the past. Now BAU is not all bad… after all, it works - and provides revenue, profit, and opportunity for growth. But because BAU is ring-fenced, changing it becomes a risk, and so BAU is simply ‘doing the same thing over and over again’. In our world of rapid technological change and increasing customer expectations, that seems like an implausible strategy.
The need for Innovation as ‘supplementary’ to BAU
Everyone recognises that BAU is not enough, and needs an alternative or parallel set of activities aimed at propelling the business forward. So Innovation became a business imperative. Everyone who previously didn’t do it, had to do it. An industry of Innovation experts, consultants and agencies was born. Everyone either is, or would like to be Innovating, and they’re working hard setting up teams, departments, projects, Labs, and processes to do it. Many attempts, whilst honourable, are misguided. If a business is failing or lagging, a small investment in ‘Innovation’ will not fix it. Rather, Innovation at the heart of BAU, if taken seriously can achieve dramatic results.
Accounting as the enemy of Innovation?
Innovation however cannot be run along the same lines as BAU. By its very nature it needs special consideration. Money is not simply the answer. Why? Because the very fundamentals of Innovation are at odds with the very fundamentals of BAU. BAU is known - a business knows what it does, how much that costs, and what returns that generates. Simply, the Return On Investment has been calculated, proven, and forecast. Innovation cannot be accurately costed, the return cannot be predicted, the ROI cannot therefore be calculated. When planning, a manager must plan (and request) budget to spend (expenditure). Expenditure can be either CAPEX (Capital Expenditure) or OPEX (Operational Expenditure). OPEX generally describes BAU activities, whereas CAPEX covers new capital investment. But to secure budget for CAPEX (for example for an ‘Innovation Project’) a manager must create a Business Case - showing the projected Return on Investment. In Innovation, the answer to the question “What’s the ROI?” is most likely “We don’t know!”. And that doesn’t wash with the Finance team so CAPEX investment in Innovation is unlikely to get approved. It is due to this aspect of business management that Finance structures might be said to be the enemy of Innovation.
The Ring-fenced Innovation Budget
Most business have grappled with this issue, likely over the past few years and many have defined ring-fenced ‘risk’ budget, like Seed Capital for Innovation. But this means that Innovation has been seen as a special case. What this highlights is that financial structures and practices support only those activities which can be quantified based on past performance (they are backward, not forward looking). Ring-fencing budget outside of BAU may seem like a good idea, but it means that BAU is protected, whereas Innovation is only enabled ‘if additional budget allows’. It allows some people within a business to view Innovation as a frivolous activity. Furthermore, it ensures that Innovation is not only seen as ‘extra’ to what a business does, but that BAU teams that make up the bulk of a workforce SHOULD NOT be innovating.
Truly Innovative businesses don’t have an Innovation Department
A truly innovative business is extremely unlikely to have an Innovation Department, or to have issues and tensions around funding Innovation. Innovation is not seen as a separate activity to BAU. Indeed Innovation is BAU. It’s unlikely even to be called Innovation at all. It might even be said that Innovation becomes ‘a dirty word’ and something only backward looking businesses attempt.
IAU: Innovation as Usual
So in a business which understands Innovation is simply ‘good business as usual’ how does it fund, account for, and manage Innovation? Room for experimentation, test and learn, Research and Development, Innovation, or whatever you wish to call it, must be built in at every level, in every team and in every activity. Innovation and BAU need to work along side each other. OPEX and CAPEX accounting structures should also work hand in hand to support business evolution. Along side the day to day activity of BAU there must be time, space and budget for Innovation.
Changes Are Required to Financial Management
It’s likely that requirement for a quantified and approved Business Case needs to be relaxed, or redefined. After all, the true answer aught to be ‘we don’t know’. Funds that might have been spent on developing a Business Case could have been better spent on Innovation / Test and Learn. Additionally, along side the Operational Expenditure of the BAU, there must be a Capital Expenditure on Innovation.
It can be done
What’s required is a true collaboration between all members of the C Suite. The CTO, or CIO, CPO, CMO etc cannot achieve IAU (Innovation As Usual) in a Financial Management environment that was designed to support solely BAU activities. Strong and visionary Financial Management however can facilitate this change. In essence, Finance first needs to Innovate itself before the rest of the business can follow suit.
5 Tips for Achieving “Innovation As Usual”
- Get the principle right: “Innovation” is just good business
- Innovate at every level
- Product Innovation (What you sell)
- Process Innovation (How you operate)
- Be OK with “We don’t know” and allow for that, in terms of financial reporting and management
- Align Innovation spend with BAU spend (as a percentage for example)
- Test and Learn IS your Business Case
We’ll take a look at ‘Getting Started’ in the next instalment.