By Ellis Booker\nPity the IT leader having to listen to yet another management mandate about the importance of \u201cinnovation.\u201d We get it: innovation is differentiating, strategic, vital. Those who don\u2019t try to create the future, particularly with emerging digital technologies, risk being left in the dust by those who do. That\u2019s why it\u2019s vitally important to carve out resources to explore, experiment and ask big questions.\nAccording to The CIO Agenda: Driving Value from Transformation, a report published earlier this year by The Hackett Group, enterprise digital transformation was the top IT priority after cybersecurity, which took the No. 1 spot. The report found there were more digital transformation projects underway than any other type, and that \u201c74% of respondents expect digital transformation to disrupt their industry and change the competitive landscape, while 82% expect it to fundamentally change the operating model of their business.\u201d\nUnfortunately, this does not answer the thorny question of how to fund innovation, particularly if you\u2019re in an organization forever challenged to \u201cdo more with less.\u201d\nWhatever your budget, there\u2019s no right answer to the question, \u201cWhat percentage should I allocate to innovation?\u201d That\u2019s because the answer depends on your industry (technology and financial companies spend more on innovation than, say, manufacturers), unique competitive pressures, and the organization\u2019s tolerance for risk.\nHow can a CIO make the case for adding a \u201cpromising prototype\u201d line to the budget? How can an IT organization with a fixed budget innovate? Here are six funding and organizational ideas to help turn innovation from a vague talking point into a powerful mechanism that delivers results.\n1. Talk Benefits, Not Savings\nWhile plenty of IT innovations promise to reduce time or expense, it\u2019s far wiser to advocate how these things will answer a customer need or give the business bandwidth to pursue new, revenue-driving activities.\n\u201cShift the conversation from cost to the benefit,\u201d says James P. MacLennan, SVP & CIO at IDEX Corporation, a publicly traded company engaged in the development, design, and manufacture of fluidics systems and specialty engineered products.\n\u201cMake the case that shifting resources will drive customer satisfaction or drive revenue, not cut cost,\u201d says MacLennan, IDEX\u2019s CIO for nearly 6 years, and longtime blogger\u00a0about innovation and the role of IT in creating value. \u201cThis is where IT has to get its marketing, sales and finance hat on.\u201d\nIf an innovation leads to cost savings, MacLennan says to hold onto as much of that newly found money as possible. In other words, don\u2019t hand it back to corporate, but reinvest it in other, promising projects. How much to hold back? \u201cThere\u2019s no rule,\u201d MacLennan says. \u201cBut you have to have that conversation.\u201d\nTo help those conversations go well, MacLennan and others stress that CIOs must quantify how every bit of the current budget is allocated. Show you\u2019re working on the company\u2019s priorities, not wasting time on projects that aren\u2019t aligned with business goals, and show you\u2019ve wrung cost out of everything possible. After that, MacLennan says: \u201cIf we still can\u2019t get to really important things, the only answer left is to change priorities or say, \u2018Give us resources.\u2019\u201d\nIt\u2019s also helpful to apply some sort of minimum benefit. \u201cWhatever the language of business success is in your company, use that,\u201d MacLellan says.\nAt IDEX, which posted sales of $2.3 billion last year, proposed projects that aren\u2019t expected to kick out at least $1 million, or around a penny per share, don\u2019t pass muster. If you can\u2019t make that case for your project, \u201cI don\u2019t want to talk to you,\u201d MacLennan says.\n2. Lots Of Little Bets\nNot everything has to be a big project.\n\u201cOne time, we took a bet on some cloud technology we\u2019d been wanting to play with,\u201d recounts Jonathan Feldman, CIO for the city of Asheville, N.C. \u201cAnd guess what? It was a terrible bet. The engineers and the project manager came back and says, \u2018There\u2019s no way our staff is going to be able to use this technology.\u2019 And so we dropped it.\u201d\nBecause you don\u2019t know what will work, Feldman advises diversification. \u201cDo lots of little experiments, not a gigantic big one,\u201d he says. \u201cCFOs understand investment, understand that not all bets pay off, and aren\u2019t going around looking for how many $5,000 or $10,000 projects they can slurp up.\u201d Couple this risk-management approach with keeping pilots short \u2013 say, a quarter \u2013 and make sure they have clear success and failure gates. \u201cIf you set it up right, you\u2019ll know pretty quickly\u201d what the results are, he says.\n3. Make Time For Innovation\nExperts cite Google's famous \u201c20% time\u201d management idea which founders Larry Page and Sergey Brin highlighted in their 2004 IPO letter:\u00a0 "We encourage our employees, in addition to their regular projects, to spend 20% of their time working on what they think will most benefit Google," they wrote.\nWhile there\u2019s healthy debate about Google\u2019s 20% time, the notion of giving employees explicit permission to allocate some time to follow their interests in pursuit of valuable innovation, still strikes many as a good idea.\n\u201cComing into this job two years ago, I thought I needed all this budget for monetary incentives,\u201d admits Michael Todasco, director of innovation at PayPal. \u201cIt couldn\u2019t be further from the truth. Look, the thing that people strive for is not a bonus for a blockchain project, they want to learn, build something cool, a prototype that customers can see, and work with a bunch of smart people.\u201d\u00a0\nAnother idea: allocate some of your training budget toward experiential learning.\n\u201cToo often, people think that training is about sitting your ass in a room for a week at a time and getting a certificate,\u201d says Feldman, who suggests another approach is to \u201chit two birds with one stone\u201d by investing in experiential learning \u201cthat can also pay off, potentially, for the organization.\u201d This could be buying a drone, or a $10,000 cloud computing project, or creating an Alexa skill.\n\u201cWhatever that is, I think that if you\u2019re not looking at your training money as a source for investment in innovation, you\u2019re doing it wrong,\u201d Feldman says.\n4. Organize For Innovation \nRather than have each department figure out which initiatives to fund, consider creating a centralized organization that will both evaluate and bankroll innovation projects, says Ed Marx, CIO at the world-renowned Cleveland Clinic. Cleveland Clinic Innovations (CCI), the commercialization arm of Cleveland Clinic formed in 2000, uses a unique approach to assess, protect, build, test and market the most promising ideas.\nBut others insist a decentralized approach is the way to go.\n\u201cIt\u2019s important to not try and take what works in San Jose and apply it to Bangalore,\u201d says PayPal\u2019s Todasco, who is currently responsible for four innovation labs (one in San Jose, two in India and one in Singapore), with more to come. While these labs receive some support and funding from corporate, they must invest their own budgets as well, giving them skin in the game. Todasco explains that this is because employees, markets and evenregional offices think about innovation differently.\n\u201cWe don\u2019t think you can innovate effectively when you are centralized, [because] bureaucracy slows things down,\u201d says IDEX\u2019s MacLennan. \u201cI\u2019d much rather let the folks who are much closer to customers make decisions.\u201d\nCentralized or decentralized is the wrong question, according to Feldman. \u201cIf the culture allows innovation, innovation will happen,\u201d he says. \u201cIf you don\u2019t have a culture that encourages and allows innovation, you can put all the money you want into the incubator and you\u2019re not getting innovation.\u201d\nWhatever the organizational structure, there needs to be a process for evaluating ideas. Cleveland Clinic\u2019s CCI, for example, has a formal process for reaching out to a network of internal and external individuals when it evaluates promising inventions. These people\u2014market analysts, subject matter experts and former industry leaders\u2014are solicited to offer strategic advice. If a technology is deemed to merit a new venture, an independent team of investment and operational professionals will facilitate spin-off company formation, fundraising and governance.\nThat scheme makes sense to Matt McCooe, chief executive officer at Connecticut Innovations, a venture capital (VC) firm. Before his VC makes any investment, it validates the idea by having a group of outside experts weigh in. \u00a0\u201cPeople fall in love with their ideas,\u201d McCooe says. To balance the bias of a project\u2019s proponents, \u201cyou need people on the outside who will be more willing to kill it,\u201d McCooe says.\nPeer-review networking can even drive innovation throughout an industry. CCI hosts the\u00a0Medical Innovation Summit\u00a0each year to bring nearly 2,250+ executives, thought leaders, investors and entrepreneurs to Cleveland to discuss the latest medical innovations, challenges and opportunities.\nAt PayPal, every pitch to the innovation lab needs to answer the following four questions: \u201cWhat\u2019s the growth potential? \u201cDoes it solve a customer need?\u201d \u201cAre people passionate about working on it?\u201d\u00a0 Ideas have to be outside existing core products or the product roadmap. \u201cIf it\u2019s tangential, we don\u2019t touch it,\u201d Todasco says, because these ideas should be handled by the appropriate product group. Once an innovation lab delivers a prototype to a delivery team, it\u2019s up to that team to decide if the idea moves forward.\nOnce started, perhaps the hardest thing is knowing when to pull the plug. Todasco advises continuously questioning whether the prototype or project is asking an important question or answering an important customer need.\nIn any event, don\u2019t penalize failure, McCooe says. In fact, consider giving awards for innovative ideas that don\u2019t pan out. \u201cThis signals to the organization that risk-taking and creative thinking are rewarded,\u201d he says, noting that without the embracing risk and the likelihood of failures, innovation won\u2019t happen.\u00a0\n5. Novel Funding Sources\nRemember that funding is available outside the organization too, such as through industry consortia or grants. \u201cSometimes, your competition actually has some common problems that you do, which is why industry associations are born,\u201d Feldman says. He cautions that you must always take a hard look at the other stakeholders and how well their interests align with yours.\nMcCooe says to check out grants available through your state\u2019s economic development office, as well as the federal Small Business Innovation Research (SBIR)\u00a0program, which encourages domestic small businesses to engage in Federal Research\/Research and Development (R\/R&D). Each year, federal agencies with extramural research and development (R&D) budgets that exceed $100 million are required to allocate 3.2% (FY 2017) of their R&D budget to these programs. SBIR Phase I awards normally do not exceed $150,000 total costs for 6 months; Phase 2 awards normally do not exceed $1 million total costs for 2 years.\nWhat about venture capital funding? Not likely, McCooe says. \u201cThe odds of getting funded by a VC are way worse than getting your kid into Harvard,\u201d he says, noting that VCs typically fund fewer than 1% of all the companies they see.\nInnovation as a Strategy\nOrganizations that constantly think about how to do things better, faster or cheaper may discover innovations that don\u2019t require much funding. Before he joined Cleveland Clinic, Marx worked on a system at another hospital that pre-populated the ER\u2019s electronic medical record with the nine markers for a heart attack. This one small change helped ER doctors be much better at detecting cardiac patients, which resulted in 30% reduction in deaths. (Marx is compiling stories like this for his forthcoming book,Voices of Innovation, to be published early next year by Healthcare Information Management Systems Society.)\nA culture of innovation believes good ideas can come from anywhere. Todasco, whose own background is in accounting, is adamant about this. \u201cAll of PayPal\u2019s 19,000 employees are innovators\u2014human beings are innovative,\u201d he says. \u201cIt is our responsibility to create a culture that encourages innovation, one that allows people to take chances, and fail without repercussions.\u201d\nA final point: it appears that strategy, not budget size, is what matters when it comes to innovation. According to a PricewaterhouseCoopers\u00a0global study last year of more than 1,200 executives in 44 countries:\u00a0\n\u201cThe relationship between a company\u2019s level of innovation spending and economic success is, however, tenuous at best. Over the past dozen years, our annual Global Innovation 1000 study has found no statistical relationship between dollars spent on research and development (R&D) and financial performance, suggesting that the way you spend your innovation dollars is more important than how many of those dollars you spend.\u201d \nTo learn more, watch the on-demand Rimini Street webinar: 5 Ways To Fund Innovation on a Budget. Watch now.\n_____________________________________\nAbout Ellis Booker\n\nEllis Booker is a familiar name in the computer trade press, where he held senior editorial posts at a number of A-list IT publications, including CMP's\u00a0InternetWeek, Mecklermedia's\u00a0Web Week\u00a0and IDG's\u00a0Computerworld. At\u00a0Computerworld, he led the paper's internet and electronic commerce coverage in the early days of the\u00a0Web,\u00a0and was responsible for creating its weekly Internet Page.Most recently, Booker was editor-in-chief of Crain Communication Inc.'s\u00a0BtoB, the only magazine devoted to covering the intersection of business strategy and business marketing. He ran\u00a0BtoB, as well as its sister title,\u00a0Media Business, for a decade.