Editors’s note: This is the fourth of a series five articles about leading innovation by Dr. Bacon in Wisepreneur.

In innovation, as with other areas of business, the bottom line is that your organization exists to bring profits and other benefits to the stakeholders of the firm. Therefore decision-makers should allocate resources with the expectation of a return on resources they dedicate to an innovation project. Just as investments into stocks, bonds, or real estate, organizations create a portfolio[1] of innovation projects to reduce the diversifiable risks of those innovations. This helps increase the likelihood of success. However, there are other things decision-makers can do to increase the effectiveness and the efficiency of the resource allocation process.

Develop a budget that includes funds for innovation resources.
Too often leaders fail to earmark funds or innovation rather they simply assume they will use whatever is left over after expenses are covered. This is short-sighted thinking. Organizations should decide how fast they want to grow and provide enough money to fund the innovation required to get it done. For many organizations, this is hard to do because there are so many other needs for funds. However, innovation projects must have adequate funding or else they are apt to fall short of their full potential. Another pitfall is under-funding disruptive innovation projects. As Peter Skarzynski and Rowan Gibson state, “Since the vast majority of the organization’s revenues are coming from existing customer segments and distribution channels rather from new ones, it is natural for senior managers to allocate capital accordingly. Thus, the “innovations” that end up getting funded are typically the incremental product enhancements within established businesses rather than the rule-breaking strategies out on the edge[2].”

Allocate funds to support specific innovation projects with specific purposes.
Leaders may choose to allocate long-term innovation funding in a general way, but short-term funding should fund specific innovation projects with specific purposes. There should be a clearly stated customer benefit and a narrowly defined project scope. There are many potential innovation projects that any organization might choose to support, but only those that are in line with the strategic goals of the organization should have funding. All projects should have a plan that participants can use to track progress of the innovation effort.

Allocate resources proportional to the idea opportunity.
When planning resources to any particular innovation project, it is wise to allocate resources in stages and to make the amount of resources proportional to the potential opportunity. It is difficult to know what the opportunity actually is so allocating resources in stages permits leaders to assess the project before committing additional resources. While decision-makers may calculate risks and rewards, judgment is key in innovation decision making. By tracking innovation over time, leaders develop decision making skills that enable them to make sound resource allocation decisions.

Understand that disruptive ideas may be less risky that incremental ideas; risk is not always proportional to the size of the opportunity.
When it comes to implementing innovation, sometimes it’s tempting to take the safe path. After all, if an idea is actually innovative, there are plenty of inherent risks. However, occasionally the big idea is less risky than a small one. For instance when the organization has experience with the technology associated with a big idea or when the technology is well understood. In addition, the innovation leader must think about what it takes to make the organization successful. Sometimes it takes a bigger innovation to reach the organization’s growth goals. So if the organization is really committed to improvement, incremental increases may not be good enough. For some leaders, this takes the ability to suspend risk-aversion. In fact, the creativity and innovation process requires the ability to cope with uncertainty. According to Andrew Pak and Jeannine McGlade, “In business today, what is known is considered safe, and what is concrete is considered true. On the dark and unknown side, when our creative genius is sparked, we begin to venture into a world of abstraction, ideas, and possibilities[3].”

Test the potential innovation before committing organizational resources.
If testing is done properly, an organization can do it at a reasonable cost. What a leader must consider is the cost of testing versus the cost of not testing. Testing prior to fully funding an innovation project can save money by avoiding costs of a poor idea and by learning more about the project before planning it in full. Another reason for testing the innovation is that the lessons from the testing can be beneficial even if decision-makers halt the project. Leaders should create a process to institutionalize learnings from successful tests and unsuccessful test as well.

Sequence the resource allocation to correspond to the idea development timeline.
Timing of resource outlay should match the need of the innovation project. Matching funding with the project timeline assures efficient use of resources. If a leader provides resources too early, resources are idle waiting for the project to progress. If a leader allocates resources too late, then the organization must postpone the benefits from the project. This is more than just a matter of proper project management. The momentum from one well-paced project tends to affects others in the same organization. To keep innovation moving, an organization must script the action like a play.

In general when it comes to resource allocation for innovation there are two things to remember. First, allocate the type and amount of resources that will help ensure the innovation is a success. Allocating too few resources not only cause one project to suffer, but also can affect other projects by taking away the momentum and energy of the organization. Second, the organization should earmark resources well before the resources are needed. When decision-makers identify resources early, it helps remove barriers, and it demonstrates an organizational commitment to innovation.