Who pays for innovation – and what’s the return?

The same executives who praise innovation in public often dismantle it behind closed doors. Innovation features in every strategy document and earnings call. But when financial pressure mounts, innovation teams are quietly cut, sidelined, or absorbed—despite delivering value. Why? Because they rarely fit the operating logic of the core business.

This article is inspired by a discussion with a valued colleague and examines a recurring dilemma: Who should fund innovation—and what kind of return is realistic, measurable, and defensible?

More specifically:

• What types of innovation are we discussing?

• What mandates do different organizational structures imply?

• What forms of return on investment or innovation should be expected—and at what stage?

The challenge is not structural. It is strategic and conceptual. And it begins with clarity.

Defining the scope: All innovation, not just moonshots

This is not a discussion about Corporate Venture Capital, M&A, or R&D pipelines. The focus is broader: incremental, adjacent, and transformational innovation—across all business units.

From continuous improvement and new product features to entirely new business models or service architectures, So everything that is currently changing and will continue to change, because no company can afford to stand still. Each type of innovation differs in:

• Time horizon

• Risk appetite

• Resource model

• Learning velocity

Yet organizations often apply the same KPIs—typically lagging financial ones—to all of them. This is not only flawed. It is counterproductive.

Three main organization models—and their consequences

Over the past decades, three dominant models have emerged for organizing innovation within large firms. Each comes with distinct implications for funding, influence, and performance measurement.

1. Embedded in the Core

Innovation sits within operational units or P&Ls (which is what has happened to many of the remnants of corporate innovation units that were shut down in recent months). This setup ensures access to resources, immediate customer proximity, and operational integration. But it also means:

• Innovation competes with daily priorities

• Risk tolerance is low

• Most activity leans toward optimization, not transformation

Over time, innovation becomes indistinguishable from continuous improvement. Strategic bets rarely survive the operational filter.

2. Fully independent units

Often positioned as “Labs”, “Hubs”, “Incubators”, "Accelerators”, or “Outposts,” these units report outside traditional lines—sometimes even directly to the board. They enjoy conceptual freedom and may pursue long-term or exploratory work.

The downside: they often lack legitimacy in the core. Handovers are fragile or not even foreseen. And when budgets are under review, these units are first to be questioned—especially if impact is not visible in quarterly financial performance.

3. Hybrid setups reporting to the C-Suite

This model aims to combine autonomy with influence. Innovation units are formally linked to the executive team but remain structurally separate. In theory, this enables strategic alignment, long-term focus, and knowledge transfer.

In practice, the hybrid model is difficult to manage. Without a protected budget and dedicated KPIs, such units drift: too far from the market to build real traction, too far from the core to influence decisions.

The real question: Who pays—and for what?

Innovation fails not because ideas are bad, but because the internal contract is unclear. The implicit assumption is that innovation will “eventually pay off”—but that leaves the work vulnerable to short-term cost logic.

Several tensions regularly surface:

The question is not whether innovation delivers value. It’s whether the value is recognized, captured, and credited within the internal accounting logic.

We’re systematically identifying cost savings through process improvements—but the unit leader resists implementation, and we’re measured based on cost cuts that never materialize. It’s frustrating: we might optimize the system, but those who could benefit are the ones killing the impact.

Anonymous Kaizen coach in corporate transformation program

Measuring innovation: Beyond lagging indicators

Financial metrics like ROI, revenue impact, NPV, or cost savings are relevant—but insufficient, especially early in the innovation lifecycle. Organizations that rely solely on lagging indicators to evaluate innovation consistently misallocate resources.

A more sophisticated approach includes Return on Innovation (ROIN) leading indicators such as:

• Speed and quality of validated learning

• Strength of customer evidence collected through experimentation

• Number and type of assumptions de-risked

• Degree of knowledge transferred back into the core business

These metrics reflect progress, not performance. They serve as proxies for future value—particularly in adjacent and transformational innovation. More here in an earlier article.

Below is a simplified view:

Innovation as strategic market intelligence

There is a critical shift in framing required here: Innovation is not a cost centre. It is a form of strategic market exploration.

Done well, innovation reduces uncertainty, prepares the organization for future shifts, and builds optionality. But none of this is captured in traditional P&L logic unless it is made explicit—and measured accordingly.

In this sense, innovation activities should be recognized not just as R&D or incremental innovation, but as paid strategic business intelligence and foresight work. This reframing unlocks new funding logics and reduces internal friction.

A new social contract for innovation

For innovation to survive and scale, a new internal agreement is needed—one that reflects the unique nature of innovation work and its contribution to the firm’s future.

Such a contract would include:

1. A clear, strategic mandate—tied to the firm’s future capabilities and markets

2. Dedicated, multi-year funding—insulated from quarterly pressures

3. Fit-for-purpose metrics—combining leading and lagging indicators

4. Joint accountability—innovation and core units co-owning outcomes

Without this, innovation will remain exposed to budget cycles, politics, and performance metrics that were never designed for it.

Questions for reflection:

• How is innovation structured in your organization—and is the mandate clear?

• Who funds it—and with what expectation of return?

• What leading indicators do you use to guide decisions before financial results are visible?

Let’s talk.

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