Measurement is Critical to Increase Return on Innovation

Innovation is so important that most senior executives say that it’s integral to their company’s success. Because companies invest so much in it, getting a return is critical. Poor measurement practices result in bad or incomplete information, wasted resources, and a lower return on innovation investments. InnovationManagemenet asked James Andrew, senior partner of BCG and coauthor of the senior management survey Measuring Innovation 2009 a few questions about the importance of measuring your innovation efforts.

According to your report only 32 percent of executives are satisfied with their companies’ innovation-measurement practices, and that is a falling percentage. Why is that do you think? And if it´s falling, why don’t they take action to change that?

— Many companies are disappointed in their return on innovation spending, and that’s been the case since we started our first innovation survey in 2004. Most companies recognize the importance of measuring innovation and readily admit their shortcomings, but relatively few companies seem to be working as aggressively as they need to be to improve their capabilities in this area.

— When times are tough as they’ve been in the last few years, every dollar matters—and wasted investments hurt that much more.

Companies need to know whether their investments are paying off, and measurement is a key part of that.

— When they don’t get the answers they need and want, companies are more acutely aware of their shortcomings, and dissatisfaction rises.

Most executives, 73 percent in your survey, believe that innovation should be tracked as rigorously as other business operations. Yet only 46 percent said that their company actually do so. Why is that do you think?

— The executives we surveyed gave a number of reasons. Uncertainty about which metrics to use was the most common one, cited by 32% of respondents. But a similar number said that it simply wasn’t a high priority, suggesting that for those companies things are unlikely to change for the better. A smaller number blamed a lack of support from top executives (12%) and the cost of instituting such a program (8%). Other respondents noted cultural resistance, time constraints, and a belief that measuring innovation impedes the creativity process.

One of the key findings is that the majority of companies continue to rely on a handful of metrics. And 52 percent said that their company uses five or fewer metrics. What is your comment on that?

— The point of measuring your innovation efforts is to gain insight into what’s happening, how well you’re doing, and why, so you can take any needed actions. Companies need to measure three things: inputs, process performance and outputs. For example, inputs to measure might include the financial resources you commit to innovation, the number of people, and how much time they’re devoting to the effort. As for process performance, you might look at the number of ideas your company generates, how many progress from one stage to the next in your innovation process, and how many get bogged down. The third thing to measure is output—the cash profits and indirect benefits that innovation generates. Indirect benefits include such things as knowledge acquisition and brand enhancement.

How many metrics, and which ones, do you recommend to do a good enough job in measuring?

— We’ve found that the right number is between eight and twelve. Less and you’re not getting enough information on inputs, outputs and process, more and the data gets overwhelming. But the ”perfect” metrics are less important than the fact that you use a thoughtful set of metrics, and use them consistently.

Why is it so difficult for companies to find relevant metrics?

— In our experience, it’s not that finding relevant metrics is difficult. What seems to be a challenge for companies is making measurement a priority and sticking to it.

Why is it so important to measure your innovation efforts?

— Measurement drives success, and successful innovation is critical. It is the key to driving organic growth and competitiveness in today’s global economy. For most companies, innovation increases stock price and creates an advantage in the marketplace. Innovation is so important that most senior executives say that it’s integral to their company’s success.

— Because innovation is so important and companies invest so much in it, getting a return is critical. Poor measurement practices result in bad or incomplete information, wasted resources, and a lower return on innovation investments.

Would you say that benchmarking, for example with the help of a database, is essential in order for you to make sense of your metrics?

— In our experience, benchmarks are of limited use. They can highlight potential opportunities, but many companies tend to over-rely on them. We have very detailed databases and benchmarks, but their value is in application, not the numbers themselves, and you need to really understand them for them to be helpful.  Benchmarks are most useful as directional signposts to identify potential opportunities.

What would your advise be to a management team that really wanted to start doing a good job in measuring their innovation efforts?

— Pick between eight and twelve metrics that really matter, that measure inputs, outputs and process. Then be consistent in following through, and really understand what your metrics are telling you.

— We also suggest that companies analyze the four key factors that support—or hinder—innovation returns: start-up costs, time to market, time to volume, and support costs. These four factors can be mapped onto a cash curve, which can help companies track cumulative cash investments and returns, both expected and actual.  The cash curve shows the “payback profile” of an innovation and its critical stages. This picture helps ensure that everyone involved in a project is seeing, evaluating and most importantly discussing the effort from the same perspective. It’s probably the single most important tool for managing a profitable outcome.

The BCG senior management survey can be downloaded here: BCG Measuring Innovation 2009

About James P Andrew

James P Andrew is a Senior Partner and Managing Director of BCG, based in the Chicago office.  Prior to this, he founded and ran BCG’s offices in both Mumbai (Bombay) India and Singapore.  He joined the firm in 1986.

James heads BCG’s global Innovation Practice.  He works closely with some of the world’s most innovative companies and leads BCG’s research in this area.  His experience covers all areas of the Innovation topic, including Organizational issues, Customer/Consumer Insight, R&D, New Product Development, Product Launch, Life-Cycle Management, Measuring Innovation, and developing an Innovation Culture and set of capabilities.

Mr. Andrew is lead author of the highly acclaimed book Payback: Reaping the Rewards of Innovation (published by Harvard Business School Press), named as one of BusinessWeek’s Top 10 Innovation books of the year.  He has also written Innovating for Cash, published in Harvard Business Review. He has appeared in Business Week, the Wall Street Journal, the Economist, Fast Company and many other publications, and on CBS Marketwatch and CNBC’s “Squawk Box”

James has an MBA from Harvard University Graduate School of Business, with distinction, and a BS from The University of Illinois, with highest honors.

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