How You Budget for Innovation Changes the Work

Nathan DauSchmidt, Assistant Vice President of Strategy & Innovation at Great American Insurance Group

I worked at three different P&C insurance companies with different approaches to funding innovation. All had strengths and weaknesses, so the key takeaway for CFOs is to be aware of how your budget processes may inadvertently impact the time horizon of innovation work.

At many organizations, 'innovation' is largely synonymous with 'technology' and technological change. There are certainly ways to innovate without new technology, but given this is CFO Tech Magazine, let's make them synonymous with this article.

Here are some of the insights from the different approaches to innovation budgeting:

1. A dedicated multi-year commitment of funding andwith fundingoutside of core business P&L. This led to the most exploration and radical thinking (heavy in Horizon 2 & 3innovation efforts) and reinvention of the approach (adoption of design thinking, and looking to early-stage tech companies for inspiration on work patterns). Employees felt empowered to make longer-term progress on projects without a looming budgetary process to distract from the investment made in exploration. This also meant the efforts were detached from the core business, and because many of the employees had little knowledge of how the core business actually worked, few ideas made their way into the core business. The most material ways this innovation manifested were through acquisitions (how I became a CFO of a software company) or through spinouts in adjacencies to the core business.

2. A dedicated annual budget inside the core business P&L but with frequent calls to return the budget. This created a culture of making prudent bets to improve the core business largely through Horizon 1 &a bit of Horizon 2 innovation efforts, but the runway was never long enough to meaningfully extend into Horizon 3. The fact that some vendors' spending for the core profit center was controlled by the innovation team meant that experimenting with a new vendor as a pilot was organizationally the least complex I have seen (a big plus). The overall organization had a habit of going to unit leaders and asking for projected unspent funds every 2-3 months. Asking an innovation team for the budget to be returned in Februarywho spent several months in the fall asking for an experimentation budgetreally stifled any mentality of multi-year efforts, and that showed in the limited range of product extensions and improvements proposed. Any money that was unspent at the end of the year was lost to the group, which only incented pre-pay workaroundto vendors and less prudent spending at the end of the year.

3. Minimum annual allocations but with opportunities to pitch budgets for projects anytime.This approach allocated for salaries, travel, and small discretionary spending. The expectations of the group were more to identify projects and initiativesthan to pilot them and, if piloting was warranted, to then make the individual case. This invites a lot of scrutiny into what is experimented with, which is a good way to control spending but also a long way to look at a problem as you convince the gatekeepers without the ability to iterate and truly understand the dynamics at play. If this approach is in a highly diverse set of business units with decision autonomy, it can work as these business units can co-opt the initiative and ramp it up within their operations.

There’s a lot more to say about the approaches above, and they by no means are the only dynamics at play, but the overall message is to study your organization’s mentality about how it tries (and funds!) new initiatives and experiments. Try not to let budgeting unintentionally skew the types of things that get funded and worked on. Maybe innovate a bit with your own process

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