How to Increase ROI on Innovation Spend

Innovation in business is often a two-edged sword, promising business breakthrough on the one hand but very seldom delivering on this promise.

Anton Moulder, Managing PartnerPosted in Digital Transformation

Innovation in business is often a two-edged sword, promising business breakthrough on the one hand but very seldom delivering on this promise. While there is an inherent risk in spending money on any innovation project, these initiatives have historically delivered poor ROI. So much so, that if you were to ask most business leaders if they have seen a direct link between an increase to their bottom-line in line with their innovation spend, they would say: "No"

Why is this? When there are so many examples of companies experiencing incredible growth from innovation?

Innovation budgets and the projects they run are often victims of poor implementation, from what is being worked on and how the projects are being run through to how projects are measured. In most companies if you ask whether innovation and digital transformation is important to the success of their business, they will say yes!

However, the ability to do this and execute is lacking. In the same vein, if you ask companies whether they are happy with the interaction they have with other companies, most will say that they’re not, and that there are some real challenges that need to be overcome. So, on the one hand everyone agrees that digital transformation is super important, but on the other hand the actual redesign of their key interactions is lacking.

The reason, for many, is that while they have recognised the importance of digital transformation and may have allocated some budget to it, the real-world returns have been lacking or are even completely absent. Delivery is not success, but how do you even choose what projects to embark on? Choosing a project in many cases tends to be personality driven. Where an individual, who is skilled at pitching, can present a good business case, often tagging on buzzwords or things that they know the Execs are aware of or expected to deliver on, in order to wrangle buy-in and budget. Often, these projects are literally pitched to deliver a just below unrealistic ROI.

Start Small and Build From There

A more reasonable and responsible way to measure ROI properly is to start by doing something small, present and take back to the drawing board. Following a decision-gate model, the project team then gets feedback, and it is determined if there is enough success, or if the project is showing enough potential, to make it worth continuing with. If not, there were probably some worthwhile learnings and insights gained. If it is a go, then more budget is allocated, and the project is advanced to a higher delivery outcome.

However, in most cases, funding is allocated as a lump-sum paid in tranches over a period of 18 or 24 months. Once initiated, there is usually no mechanism in place to allow the team to pull the plug if it becomes clear that the project is not going to deliver what was expected. This is because delivery on projects is usually linked to employees’ KPI’s, so in order for them to ensure that they are achieving their personal review metrics, team members will drive a project through to completion, irrespective of whether the project is going to deliver value or not.

Consequently, no-one takes a step back and asks, “is this actually a good idea?”, and it is very seldom that end-users or customers are engaged with to determine whether the project is delivering value to them. A good analogy for this is when companies first determined that they needed a website in the early 2000’s. Everyone agreed that you need a website, and then once you had one, we looked at each other and asked, “what now?” It turned out that having a website was not enough, now you needed to do something to get people to visit your site and, over time, understanding and innovation grew. As with any new thing, some people loved it and others were dubious, saying that they did not really know if you needed a website.

Innovation necessarily implies a maturing process and with it some lessons, sometimes expensive, that are learnt when there is a steep learning curve. Given the relative newness of digital transformation, many companies do not yet have the in-house expertise to successfully implement a transformation project that delivers to ROI. Consequently, external partners are brought in. This has its own dangers since the standard consulting model often includes drawing customers farther into buzzword-laden water that is a mile wide and an inch deep. Real impactful delivery can only be achieved by teams that have a track-record of executing and shipping to the required ROI.

Success Hides In Its Definition

So, to start do not take on a giant project. Rather, make smaller bets that have shorter timeframes and spend budget in quarters not over 18 months. CIO’s and CFO’s, who are responsible for this, understand investments and understand that not all investments pay off equally. What they mostly want is to mitigate risk. Maybe there are smaller bets that do not bring as high returns but also do not carry as many risks and require a smaller budget? Over time a cluster of five or ten of those projects, successfully completed, may get you further down the line than taking one big bet on one big 18-month project.

The challenge of course is who will do this in a company, who has the bandwidth and the vision to undertake these projects and are South African companies transformed enough to do this? In our experience, this type of work is hard for a company to do themselves and will most viably need to be done in partnership with a specialist third party service provider.

In addition, the metrics that show what the real ROI is are hard to measure and often not measured at all. Simply looking at it in monetary terms is short-sighted and ignores other factors such as goodwill, new channels being opened, cause/effect relationships and momentum being generated. Breaking larger innovation projects down into smaller projects with smaller budgets and incremental improvements are also tricky because their returns will take longer to show.

Perhaps a better measure is to very clearly define what has actually improved and by following that measure it becomes feasible to determine that if for example customer acquisition improved by 15% over the project term, then that could also be expected if implemented on a large scale. In the absence of such a clear metric, it will remain important to have some clearly defined outcome that will serve as a gate that either confirms the project should continue or that the plug should be pulled.

Do These Three Things to Improve Your Innovation ROI

  1. Take a page from Google’s playbook, especially in terms of operational thinking. To this end, encourage teams to innovate. Give them the freedom to explore and innovate. This may even be incentivised.
  2. Innovation is also about organising. Have a plan in place. Do not just task people with having to be innovative. Create a structure that facilitates how innovation should happen, be it with a dedicated budget, a revised organisational structure or a more accommodating strategic framework with a dedicated innovation pillar.
  3. Most innovation projects are slotted into business as usual, which is just poor implementation. Balance innovation with the need for BAU. Don’t pull resources away from work that needs to be done, but look at some challenges or inefficiencies, solve them and in so doing get more budget and as you solve problems continue to reinvest money that you are saving.

A great way to kick-start this is to require any innovation project to put on its finance hat and be realistic about how much business the innovation will bring? Based on projections you decide if it is worth pursuing and if so, then you need to look at how much time it will take and how much money you will really need to implement the solution.

Success Breeds Success

Even if your business has had a bad experience, not innovating is not an option. As the saying goes if you are not moving forward you are moving backwards. The best option for you is to be more mature about how to go about it. Place less big bets and rather take smaller bets knowing that some will pay off and others will not. Once you get a few of those under the belt you will start to build up a track-record and a budget that should allow you to place bigger bets and go after more ambitious goals.


Anton Moulder

Managing Partner at Urbian

Anton advises senior executive teams on digital strategy and product innovation.