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 can be a little more complex.
There are often reports published of how much some larger companies spend on Research and Development (R & D). This is not strictly the same as Innovation but allows us to get a handle on it. The figures vary a little but figures of around 1% of turnover are not uncommon.
So a company turning over say $100 million would expect to budget around $1 million then?
Maybe but not necessarily. I once helped a company with such a turnover and the budget per annum was probably closer to 0.1% of turnover.
How come, you might wonder? Well for a start I used some tools to measure the capacity of the business to innovate which meant that when we identified areas for improvement we did not have to spend money across the whole of the company. Investment in training and development activities was targeted.
Because we rotated staff through the Innovation ‘centre of excellence’ we had the opportunity to work with all staff eventually and the postings were seen as beneficial, something everyone looked forward to. Not only that but it was an ideal way to spread know how gained back into the business as a whole.