A common question we hear from firms is how to budget for innovation.
I’m always excited to hear that firms are interested in dedicating resources to innovation. But like most budgeting questions, there are rarely simple answers.
As such, I recommend the following three-step process for your firm to get there:
1. Assess Technical Debt
To move forward, you need to take a step back to assess the firm’s technical debt. The term “technical debt” describes the costs a firm incurs when they choose an expedient route over a long-term approach that would take more time and effort.
Think supporting several versions of QuickBooks rather than transitioning clients to QuickBooks Online, having users on different versions of Windows or running other applications that are no longer supported. You cannot invest in things like Robotics Process Automation (RPA) or Data Analytics without paying off technical debt first because your time and budget are going towards upgrades and maintenance to existing systems.
You are relegated to being reactive and fixing only what is broken. Cloud-based systems that are mobile and integrate with one another are not innovation. They’re table stakes.
2. Change the Way You Budget
Budgeting for innovation isn’t just about adding new line items to your existing budget. It requires a new way of budgeting. Consider the changes taking place in firms today.
Outsourcing and automation are changing the organizational structure of firms from pyramids to diamonds. Investments in these areas have changed the way we’re spending, so the way we budget should change as well.
Firms tend to spend the most on things that make the least amount of impact: applications. These are the things you need just to keep the lights on, and the cost goes up by around three to five percent per year.
If you are budgeting for a three to five percent increase in your technology spend each year, you’re simply maintaining the status quo. This standard increase doesn’t allow for innovation.
3. Change the Conversation
In your firm, there are likely three different groups having budget conversations: finance leaders, firm leaders and innovation leaders. While innovation leaders are obviously interested in the resources the firm is ready to dedicate to innovation, finance and firm leaders are most interested in other details.
Your finance department (or individual) wants to see the typical line items, such as operating and software costs. Your firm leaders are interested in what you’re spending on items such as security, which is difficult to split out because the cost is rolled up into applications.
To address these three categories of stakeholders, we created a budget template with three separate tabs:
A worksheet for financial leaders that breaks your technology budget into traditional line items.
A worksheet for firm leadership that breaks out the cost of security from applications. To identify the real security budget, you may need to look at networking equipment that has embedded security functions, enterprise applications, outsourced or managed security services, business continuity or privacy programs and security training. Most firms spend an average of around 6% of their overall IT budget on IT security and risk management
A worksheet for innovation leaders that breaks out innovation spending by project. For example, it may show the consulting fees, software subscription and maintenance fees, hardware and other expenses for CRM deployment and AI research and development.
All three tabs of the budget template tie, but it provides an illustration to frame the conversation differently based on who is having the conversation. It will help you communicate that you need to invest in paying off technical debt before you can free up capacity and budget to focus on more innovative projects.
Work is changing. Technology is changing. Address the issue of technical debt, change the way you budget and reframe the conversation around IT and innovation budgeting in a way that meets the needs of your stakeholders. This will help you look at technology spending and prioritize projects that will address the greater changes taking place in the profession.