How do you get to work on the most interesting tech projects at Vanguard, the mutual fund giant? You volunteer.

Like most companies, Vanguard has wrestled with how to make innovation a part of its everyday culture, without chasing every gee-whiz idea people come up with. Under CIO Paul Heller, volunteering has become one key piece of its innovation strategy. It's not a Google-like program, where engineers can set aside 20% of their time to pursue new ideas. Vanguard volunteers keep all their day-job responsibilities and log extra hours to work on more cutting-edge projects.

The strategy has several advantages. One is keeping the cost down to pursue prototype-stage ideas. An example is Vanguard's first iPhone app, which it launched last year. No single business unit could justify building an iPhone app based on short-term ROI. While smartphones are commonplace, the number of people using the new app in a week is less than the number using the Web site in an hour. So a volunteer team created a first version, which the retail investor division got without spending any of its budget. "The first release was kind of on the house," says Jeff Dowds, who leads IT systems for the retail group and championed the mobile project.

For employees, the volunteer plan lets them work on something they're passionate about, with the blessing and support of their bosses, and get credit for it if it works. For Vanguard, it also serves as an informal vetting mechanism--almost like a startup trying to raise venture capital. People are betting their time and reputations on volunteer projects, something they'll risk only if they think those projects will pay off for the business. Vanguard has more-formal channels for funding innovative IT projects that can pay their way. The volunteer effort tackles projects whose benefits likely are further out.

CIO Heller doesn't hold the iPhone up as a mind-blowing innovation--hundreds of thousands of iPhone apps were out when Vanguard came out with its own. But very few were in financial services, and Vanguard customers weren't clamoring for them. Vanguard wants to have mobile development skills and experience well ahead of customer demand, and well before an operating group can make a business case for such apps.

"It's applied R&D," Heller says. "We can look two, three years out and say, 'Rich Internet apps are going to happen. We already see it on The New York Times or Amazon.com. Don't we want to do it?' We want to pave the way on the technology, so the first businessperson up who wants to do a rich Internet app doesn't have to figure it out on their project."

Vanguard has tried other approaches to IT innovation. For decades, it was a fast follower. Then it created a formal innovation lab, with marching orders to spot the latest emerging tech that could give an edge to the company. But that work was too far removed from current business needs, Heller says.

Now Vanguard has just a five-person IT innovation group. Its job is to organize those ad hoc volunteer teams around a project and coach them through techniques such as agile software development sprints. But the ad hoc teams do the work.

"This isn't innovation as in 'Let's be cool to show stuff off to our external clients,' like doing retina scans," Heller says. "We try to be really connected to our business and clients."

Keeping IT in touch with business needs is easier at Vanguard than at a lot of other companies, since it regularly moves people in and out of IT. Heller held multiple business positions, then worked a multiyear stint as an IT manager, then led key business operations, and has been CIO since 2006. Tim Buckley started in a business unit, helped shape Vanguard's early Web strategy, became CIO, and now leads the company's retail division.

But until the volunteer effort was launched, something was missing. "We had a little bit of a lull on the innovation side," Vanguard CEO Bill McNabb says. McNabb says he and Heller talk about always having some IT in the works that has a "wow" factor.