Lean Budgeting is the practice of funding innovation initiatives just-in-time and just-enough to reach the next stage of development and deployment. Rather than making assumptions about required investment or value in the long run, the Lean Budgeting approach tries to limit the period of committed funding to the shortest iteration.
Most organizations reserve a specific part of their budget for ‘innovation’. In line with common budgeting principles, this budget is ‘accounted for’ in an annual planning cycle, with innovation projects being ‘awarded’ part of the budget for the following year. This leads to a practice where both the cost and benefits of innovation projects become largely based on assumptions and good faith. The purpose of lean budgeting is to use a (relatively) small amount of money to prove that the most threatening factor to the success of the innovation can be mitigated or resolved. After proof has been established, the next ‘fail-factor’ of the innovation is determined and work on the resolution is funded.
This way of working, commonly referred to as Eric Ries’ ‘Fail Fast’ principle, ensures that the organization frequently re-establishes the potential value of the innovation and that sufficient budget is available to successful ideas whilst spending the least possible amount of money on failure. Especially the latter is important in the Lean Budgeting concept: Lean Budgeting is not a way to minimize the total spend on innovation, it is a way to spend as much money as possible on successful ideas. By quickly stopping the funding of unsuccessful ideas, funds become available quicker to new ideas waiting to be developed. The total budget for innovation is fixed, and the goals is to maximize the number of ideas tested in the market.
The Lean Budgeting process requires a change in mentality in two ways:
- Budgets are a means to increase speed rather than to minimize risk
- Lean Budgeting requires a short cycled decision-making process
Budgets are a means to increase speed rather than to minimize risk
In traditional budgeting cycles, budgets are effectively used as a means to reduce the maximum risk the company can incur. For instance by limiting the amount of money to be spent on a project to X-20% of which the value is predicted to be X. In this way, the company ensures a profit margin of at least 20%. By applying the same principles to innovation budgets, the organization is forced to make predictions of the potential value of the innovation. With most innovations, such predictions are simply impossible to make. In much the same way it is very difficult to predict a realistic budget for the development and implementation of the innovation.
Effective innovation budgeting does not take a risk-mitigating approach. Instead, it sets out to fund the innovation development in stages in such a way that the budget stimulates finding the smallest possible solution to the biggest problem for further success. By limiting the budget, the organization stimulates the innovation team to be creative in proving the potential success of the idea as quickly as possible, rather than overspend on the assumption-heavy technological development or ‘gung-ho’ market introductions. This is, however, not achieved by providing as little funds as possible, but by reducing the budget in combination with the available time in which it can be spent. Each stage of development should be limited in time and funded well enough to achieve the goal of each development cycle, but no more than that. Innovators and the Innovation Team should feel challenged and enabled to reach their objective, but not stricken for cash.
Lean Budgeting requires a short cycled decision-making process
Traditionally, the budgeting process is a ‘once-a-year-all-encompassing’-process. This is not the case in Lean Budgeting. Although in most organizations the total innovation budget will be fixed at the beginning of each year, the Lean Budgeting principle requires that budget allocations are made at least once every six weeks. At the end of every Six Weeks Innovation Challenge (SWICH) each innovation should receive an immediate and definitive answer to the questions whether or not budget for the next iteration of experimentation will be granted by the Continuous Innovation Board (or through delegation by the Innovation Coaches). For the CIB to be able to make such a swift decision the following needs to be in place at the end of each iteration:
- The specific time at which the decision needs to be made needs to be fixed.
- The criteria for making a positive decision need to be known beforehand (in fact, it should already be clear for all, before the decision is made, if these criteria are met).
- The availability of funds needs to be certain.