# 1 Budgets for innovation

What is it?
Allocating a proportion of an organisation’s budget to allow for the development of innovative initiatives.

How could I use it?
Local authorities are being asked to do more with less. And as they do, the pressure to innovate increases. The evidence is that financial imperatives are often critical to driving innovation in the public sector.

Many local authorities have begun setting aside budgets for developing innovative ideas and or accessing innovation funds. Examples include:

1.    Top-slicing – providing budget for innovation by ‘top-slicing’ a percentage of a department or organisation’s budget and setting it aside for innovation
2.    Earmarked funding – for example Regional Improvement and Efficiency Partnerships (RIEP) Innovation Funds – providing funds to assist local authorities in the initiation of small scale innovative practice
3.    Outcome-based budgets – providing payment on outcome (like the number of residents using a service) as an incentive to pilot more radical innovations.

Where has it been used?
1.    Top-slicing
Top-slicing is a common practice in the private sector where companies often reinvest a significant proportion of their profits into research and development (R&D) to create new products and stay ahead of their competitors.
•    Companies in the pharmaceutical and biotechnology sector typically spend around 15% of their annual turnover on R&D to remain competitive. (more than £52.5 billion a year).
•    Many local authority departments have specific innovation funds, top-sliced from their overall budget. For example, Knowsley Metropolitan Borough Council allocated funding from departmental resources to support managers to take time away from their day jobs to work on new approaches to tackling youth crime.

2.      Earmarked funds
Setting up funds that can be drawn down by individual authorities for specific initiatives can be one way of stimulating innovation. RIEP Innovation Funds have been set up on this basis:
•    England’s nine Regional Improvement and Efficiency Partnerships (RIEPs) accept funding proposals for small scale, innovative and collaborative improvement projects. Criteria for the funds usually include demonstrating how projects achieve Local Area Agreement priority outcomes or contribute to National Indicator 179 (value for money). For example,
South West Councils RIEP has approved £450,000 for 2009/10 to allow local authorities in its region that are struggling due to a lack of funding, expertise or capacity to initiate small scale efficiency or improvement activities.

3. Outcome-based budgets
Providing payment on outcome (like the number of residents using a service) as an incentive to pilot more radical innovations. For example:
•    Pathways to work encourages people claiming incapacity benefits back into work by providing financial, employment and health support. Providers are paid to run the scheme based on success, receiving a fixed fee for the number of people returning to work. This incentive has forced providers to review the support services they provide, focus on those with the best outcomes and trial innovative new schemes.  
•    Social impact bonds are being developed in the UK to provide new ways of investment in social outcomes. How they could work:
o    A local authority or Local Strategic Partnership (LSP) identifies a problem locally, such as the number of young people entering custody or the number of people not in education, employment or training (NEET)
o    Capital is acquired, either by borrowing on existing markets, or through social investment sources, and the potential saving to national government is identified.
o    National government underwrites the bond stating how much the local authority will receive as an incentive for achieving set milestones.  This incentive would represent a proportion of the lifetime savings to national government.

More information?
•    The 2008 R&D Scoreboard
•    Social Impact Bonds
•    More information on RIEPs along with contact details and case studies.