Like everything in business that involves the investment of capital and time, innovation should be a disciplined process that has to be measured so that it can be genuinely managed. This isn’t news, but it is nevertheless problematic, because measuring innovation the wrong way, or measuring the wrong aspects of it, can be a genuine detriment to its progress.
Further, there are a lot of ways to measure innovation productivity, so choosing the right metrics requires some selectivity. Process-oriented metrics typically consider the means, such as the number of new ideas proposed or new ideas introduced. They also consider organizational outcomes such as increased capabilities with existing or new technologies, which makes them potentially useful as indicators. Financial metrics are focused on ends, the results, and include ROI-based models to track financial performance, or the proportion of sales or profits from new products. Given the many possibilities, it takes some effort to sort it all out, which is my purpose in this chapter.
In exploring the measurement of innovation we found that across the 7 stages of the innovation process (as described in chapter 5) there are at least 92 metrics. About a third of the total are qualitative, or conceptual, and the rest are quantitative. Since 92 is of course a ridiculous number, far too many for any organization to actually use, you’ll have to choose the ones that will serve you best, and leave the others aside.
Here we’ll look at the twelve that we’ve found to be most consistently useful for our clients.
1. The outputs of the innovation system significantly enhance the brand. They accelerate the acquisition of new customers, contracts, and/or clients, as measured by the “rate of new customer acquisition.” This is evident in new sales to new customers.
2. The opinion that customers have of our company, as indicated through brand image surveys, customer feedback, and analyst rankings, improves consistently and significantly.
3. The innovation system engages a large and growing set of external partners, customers, suppliers, and others, creating a broad, comprehensive, and thriving open innovation ecosystem. (We will discuss the concept of the ecosystem and the principles of open innovation in Chapter 9.)
4. The innovation system results in a significant increase in the number of attractive, new, internally-sourced investment opportunities that are available for consideration by senior managers and the board of directors.
5. Valuation of the total innovation portfolio increases significantly compared to prior period, year over year. Financial valuation methods would include NPV, asset valuation, and /or option value. Incremental innovation metrics would include percent of products/services revenue attributable to innovation within existing product/services lines.
6. The net portfolio valuation increase is at least 5x to 10x greater than the capital invested. Financial valuation methods would include NPV, asset valuation, and /or option value.
7. The number and percentage of projects that are in the innovation pipeline that are judged to be high quality increases steadily.
8. The proportion of projects in the pipeline that are not incremental projects (i.e., these are breakthroughs and new business model innovations), increases significantly year over year.
9. The number of non-incremental projects delivered as innovations to the market increases significantly year over year.
10. Speed of innovation project completion increases year over year.
11. The number of people who are participating in all aspects of innovation efforts increases significantly year over year.
12. The quality of the contribution by each person increases steadily, and over time more people are contributing more valuable ideas and efforts in the innovation process.
In summary, successful development of the innovation process will steadily enhance your company’s overall capability in many areas of performance including innovation, and the innovation results themselves will also get better and better.
These twelve perspectives are mutually reinforcing, so, for example, as a result of more breakthroughs and new business model innovations being developed and brought to market (#8), the opinion that customers have of the company should improve (#2), etc.
Since at root the innovation process is all about learning, improvement of innovation performance over time is to be expected as you invest effort in developing innovations and at the same time you are investing in improving the process itself.
Langdon Morris is a co-founder of InnovationLabs LLC, one of the world’s leading innovation consultancies.
Langdon is also a Contributing Editor and Writer of Innovation Management, Associate Editor of the International Journal of Innovation Science, a member of the Scientific Committee of Business Digest, Paris, and Editor of the Aerospace Technology Working Group Innovation Series.
He is author, co-author, or editor of eight books on innovation and strategy, and a frequent speaker at innovation conferences worldwide. He has lectured at universities on 4 continents.
The Innovation Master Plan: The CEO’s Guide to Innovation is now available at Amazon.com.