The economics of innovation

Business case for design: Forecasting for success

Each of the levers in yesterdays post on accounting will affect key parts of your company's financial statements. To convince the CFO of the value of your design project you'll be forecasting scenarios based on the proposed investment in research, design and innovation. These scenarios can be as simple as guessing the number of units you will sell of the new product or as complex as full financial models of the entire organisation based on discount factors for out-years.

If your CFO is seeking basic forecasts then your analysis from above will be persuasive here as well. If however, your CFO asks for scenario plans and mock-financial statements then you'll want to enroll the help of a sympathetic accountant or financial analyst

The flaw of top down forecasts is that they risk being "pie-in-the-sky" and ignoring the organisation constraints. We see this most often in clients as, "The Chinese market for this product will be billion so we only need to get one percent of that and we'll have a run-away success."

Work with your ally to create forecasts that both stand robustly in the present and aspirationaly in the future. The most powerful technique we've met to achieve this is future-casting five years ahead aspirationally and then looking back from there brutally to see each step involved.

Business case for design: Statistics and lies

The last line of defence in your case for design investment is the overall impact of design in business. There are several reputable organisations that have spend quite some time and money to analyse how spending on design creates impact on the bottom line.

Interbrand have some fantastic international analysis on the Best Global Brands 2008 and they discuss how to value your brand based on future earnings using (1) forecast financials, (2) economic analysis, and (3) how your brand influences ongoing consumer demand.

The Design Council UK found in 2001 that a basket of companies using design grew by around 10% faster than the market. The Danish Design Centre found in 2006 that out of 800 companies (staff from 35-200) those that use design had growth in gross result (gross profit discussed above) of 250% compared with companies that did not.

In 1993 Roy R. and Potter S. (of the Open University in the UK) found in a study called Winning by Design that 94% of projects using design that were implemented achieved a positive net return. On average the payback period was 14.5 months. Interestingly, product design projects took 15.9 months to pay for themselves and graphics/packaging projects took 11.5 months.

Finally, the Irish Center for Design Innovation gets it in a big way and is worth pointing your finance team towards.

Armed with your economic levers, your accounting impacts, the specific forecasts and some aggregate data to support your assumptions you are now ready to face your CFO.

The second question your sympathetic accountant will ask is: "How are we going to account for the non-cash impacts of your project?"