Sunday, March 24, 2013

Innovation Metrics

Innovation metrics is always a hot topic and a welcome ice breaker in any cocktail party (at least at my house). It's a topic that I discuss at length in my book, Living in the Innovation Age (TekNirvana, 2011). In Chapter 9, titled "Knowing What to Measure – Picking the Right Innovation Metrics", I explain how picking the correct mix of innovation metrics is key to inducing the desired behavior. That's because, as I explain in the chapter, what you measure will most certainly have an impact on how your organization behaves and views your innovation initiatives. Some of the more common innovation metrics include:
  • Return on Investment (ROI)
  • Total Research & Development (R&D) budget or total research and development headcount
  • Number of ideas submitted by employees
  • Percentage of sales from new products or services
While all of these metrics can be valuable for driving investment in innovation and evaluating results, each metric by itself provides a narrow view of the total innovation picture. Additionally, each metric by itself can induce both positive and negative behavior. For example, consider the seemingly straightforward and innocuous metric ROI. While ROI is most certainly a meaningful measure, it might cause an organization to avoid a potentially risky but highly lucrative market in the long term in favor of a lower potential but more measurable market in the short term.

Scott Anthony recently posted a blog entry titled "How To Really Measure a Company's Innovation Prowess" in HBR, which also addresses the topic of innovation metrics. Since the primary purpose of innovation for private companies is financial impact, Scott discusses Return on Innovation Investment (ROII) as a reasonable, aggregate measuring stick for innovation. Not surprisingly, ROII is calculated by taking the profits or cash flows produced by innovation and dividing that figure by the cumulative investment required to create those returns. ROII can be further sub-divided into three more micro metrics as follows:
  1. Innovation magnitude (financial contribution divided by successful ideas)
  2. Innovation success rate (successful ideas divided by total ideas explored)
  3. Investment efficiency (ideas explored divided by total capital and operational investment)
While ROII and its sub-divided forms appear to be reasonable measures, the challenge is always having the data to actually calculate them. The lack of common definitions and publicly available statistics makes bench marking difficult. Simple questions, like "what defines an idea?" or "what does 'success' mean?" need to be answered in consistent ways - a concept that I discuss in my book as well.

The Bottom Line
Defining the right metrics for your innovation efforts is both an art and a science. It can especially be tricky since there is no single answer that is appropriate for every organization, which means that the optimal set of metrics will vary from company to company. Therefore, the best approach is to use a balanced mix of metrics that focus on the entire innovation life cycle from inputs to outcomes.

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