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Idélaboratoriet is a consulting company specializing in creativity and innovation. Idélaboratoriet was founded in 2000.

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#26 How Can You Measure Innovation?

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The Serious Innovation Newsletter # 26

There seems to be a new buzz in the world of innovation and it does not come from the R&D departments.  It does not come from the entrepreneurs. It seems to come from the boardrooms, the number counting consultancies and the CEO’s of the big multinationals speaking about innovation at flashy conferences. What is the buzz about? The next big thing on the innovation agenda seems to be the question of if you can measure innovation? And if Yes, then How?! And just that is the topic of the Serious Innovation Newsletter no. 26 – how can you measure innovation?

Maybe it is a first sign of the ending of good times and the coming downfall of markets. Instead of discussing creativity and ideation, people in the innovation world are starting to talk about metrics. Instead of showing each other the latest mind bending products on the web, colleagues are sharing reports on the cost calculations and ROI of innovation. In of these recent reports Boston Consulting (BCG) more than 60% of the interviewed executives say that they use 0-5 innovations metrics, which is to say that they hard measure it at all. So there is probably a gap to fill, even though one R&D manager we met recently said: “measure innovation? Do not do it. It totally kills the innovation culture and the whole key ratio controlling system is way to short sighted for any good use in business development. Let them keep it in the boardrooms”.

The BCG survey – with of course this key ratio mania attitude that follows with business consultancies, but still… – talks about the three different phases that they think you can measure in innovation: the input, the processes and the output. Let’s look at what you possible could find as indicators for each face. The INPUT PHASE would mean the resources you put into the project in the form of people, money and knowledge. The PROCESS PHASE is the part when you act and transform the inputs and finally the OUTPUT PHASE that include includes the results in the form of cash returns, stronger brands or learning.

The survey tells us that most companies focus only on the output phase. Of the most preferred ratios are the New Product Sales – the old 3M solution of having a vision of at least 30% of its sales from products no older than three years, seems to have been the first real innovation metric to stick. And it still does. Another output measure that is among the most popular is the ROI – return on investment. And people, I really would like to know how you measure that one. It is such a broad measurement that could be manipulated from every point of view. Of the first three most popular metrics there is one that focuses on the process phase – the Time To Market factor. This hopefully indicates how well the process is functioning.  All these three metrics are very broad and looks better on paper than as real change making management tools. Where is the more specific factors? Are there none? And is the input, the true creativeness, not measurable? Thomas Edison gave himself and all of his employees idea quotas and required them to keep idea diaries. Both operated within a six-month timetable.  Sounds like an input measure that worked.

The BCG report suggests that you should have among 8-12 different measurements – I am not sure how they got that amount but it seems reasonable – and suggests the following:

For inputs:

Financial resources being committed. Every company measures this, in one form or another. But achieving and maintaining clarity over time, and using this understanding to actively manage the financial profile of an innovation, is much less common.

People. You need to track the total number of people committed to an innovation, certainly. But you also, more importantly, need to monitor how your key people are being used. Every company has individuals or small groups that are highly sought after and disproportionately valuable— everyone wants them on his/her project. Make sure you know how, and where, these people are spending their time.

The number of ideas generated and the expected payback for each. Ideas are an important input—the rocket fuel for innovation. While many companies think they have a shortage of ideas, most don’t. But if you don’t measure, you’ll never know. And if it turns out that you really don’t have enough big ideas, you’ll need to know that in order to put in place the necessary steps to resolve the shortfall.

Key capabilities. What and where are the shared resources—and potential bottlenecks—in your organization? And what are the key capabilities of innovation – idea flow, technical degrees, intellectual capacity, holistic or entrepreneurial vision?

For processes:

Resources expended per individual project and on average. A process needs to be both effective and efficient. Most companies can readily measure efficiency, so you can start there—but don’t stop there.

Cycle times for the entire process and specific parts. Speed to market can have a determining influence on how much cash an innovation ultimately generates. You need to track how long it takes to get ideas turned into offerings, and ultimately into cash.

For outputs:

The number of new products or services launched. While the absolute number of new offerings is not a financial output, you need to know what is coming out at the end of the process. This is probably the most classic way of measuring innovation output and it seems like one of the most logical to even though the question of cannibalization (see below) must also be accounted.

Incremental gains in revenues and profits. Whether the innovation is a process change, a new product, or an improved customer experience, an innovation needs to impact profits. So this seems to be kind of a Japanese Kaizen approach to measuring productivity, but it is hard to know what part of your profits you can really account for as positives changes in incremental innovation.

Cannibalization of existing product sales by new products. Cannibalization is one of the dirty secrets of innovation. Few companies measure it well or even really consider it. Most companies don’t even ask that question. Who is your enemy here the R&D or the sales force?

The ROI of your innovation activities. This is, ultimately, what it’s all about. Are you earning a sufficient return on your innovation spending? Today, only about 50% of companies think they are; a far smaller number truly know what their return is. BCG thinks innovation ROI is a key metric to use to determine how much to invest in innovation. But at the same time it is very financial and vague when it comes to finding actual problems to act upon.

Looking at these results it still seems to be a lot of things to do. What about customer surveys concerning the innovative image of the brand? What about productivity as measure for incremental innovation? What about idea generation activities produced? This subject is still really up for grabs – please scholars out there: dig in!

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