How To Estimate Your Innovation Costs
There is no manual that says exactly how to estimate innovation costs but here is a common sense approach that seems to work well. Imagine that you are a company that needs to introduce 5 new products into the market place. First of all you need to spend some time generating ideas. Without knowing your actual method of idea generation and until you have had time to calibrate your own process then this is a bit of ‘wetted finger in the air’ calculation. We know that the ration of truly wacky ideas to those that might be worth looking at is one order of magnitude i.e. 10 to 1. Similarly, the ratio of ‘might be worth looking at’ to ‘definitely worth a look’ is once again an order of magnitude.
So if we want to have just one idea that is worth pursuing then we should expect to generate at least 100 crazy ideas, thus our small company wishing to create 5 new products will need at least 500 crazy ideas. So far so good, but how do we generate the ideas? You could collect them in a suggestion box but the quality would be variable and it may take a while although the cost would be low. An idea generation session with a group of people could generate your ideas in less than a day. This would be more expensive and would only use a ‘snapshot’ of the expertise and knowledge available to you.
By now you should get the idea that we can roughly work out how many ideas are required, and how long this would take and the resources that would be used. Not all ideas make it to products so some extra redundancy needs to be built in, and then there are overheads such as management and the costs of prototyping and manufacture, but these should be aspects with which you are already familiar.
So there you are, a simple way of working out your Innovation costs. But hang on a minute, life is not quite that simple. Below is a list of other things that you might wish to consider:
- HR requirements (culture, motivation, working practices)
- Idea capture systems (how do you record ideas and avoid forgetting them)
- Knowledge transfer (what worked, what did not, avoiding reinventing the wheel)
- Feedback for improving all aspects of your process (including estimating costs!)
This is a simple guide but good enough to allow you to get some sort of handle on the cost of Innovation if you have never done anything quite like this before. Reality is a little more complex – good luck.