Measuring Innovation to Drive Business Growth
How do you measure innovation? One of the reasons that only about 1/3 of all Fortune 1000 companies have formal innovation metrics is because this simple question does not have a simple answer.
Metrics can be important levers of innovation – for driving behavior, as well as evaluating the results of specific initiatives. Companies like 3M and Google have had innovation metrics for years – the most noteworthy that 10% of employees’ time is dedicated for experimentation with new opportunities. Some companies like 3M have tried to mandate that 35% of the corporations’ revenues should come from products introduced within the past four years.
Defining the right metrics for your business can be tricky. There’s generally no one right answer and agreeing on what to measure can feel more like art than science.
The Problem: Old Metrics in a New Environment
The heart of the problem is that today’s competitive environment is radically different from the industrial environment in which traditional innovation metrics were born. Because most metrics programs begin with benchmarks of established companies that have been successful with new products (like 3M or Google), metrics tend to revert back to traditional measures of R&D or technology investment and effectiveness. Across the Fortune 1000 that do possess innovation metrics, for example, the most prevalent metrics include:
- Annual R&D budget as a percentage of annual sales
- Number of patents filed in the past year
- Total R&D headcount or budget as a percentage of sales
- Number of active projects
- Number of ideas submitted by employees
- Percentage of sales from products introduced in the past X year(s)
While some of these metrics are valuable for driving investment in innovation and evaluating results, they provide a limited view. In today’s environment in which “open innovation” (sourcing ideas and technology from outside the company) can create differentiation and competitive advantage, for example, some of these metrics actually inhibit strategic innovation. And in an environment in which disruptive innovation and cannibalization must be wholeheartedly embraced as a core strategy, fundamentally new types of behaviors are required, and subsequently new structures and related metrics to drive these behaviors.
Another challenge experienced by business leaders interested in defining metrics is “metrics overload”. A Business Week article recently noted that “many companies have too many metrics and try to measure everything with different criteria.” This overload causes executives to view their metrics as missing “the heart of the matter” and are dissatisfied with their existing approach to measuring innovation. What gets measured drives behavior. Too many metrics leads to excessive activities that provide little value and often drive conflicting behaviors.
The Metrics Imperative
Because innovation is now a widely recognized critical requirement for virtually all companies across all industries, the metrics imperative is here. Leaders must establish a new breed of metrics that move beyond conventional measures and that:
- Create an organizational culture that supports and drives strategic innovation
- Establish critical capabilities tuned to the evolving competitive business landscape
- Evaluate innovation efforts to ensure both return on investment and support feedback loops of learning and improvement
- Drive profitable growth
A Framework for Innovation Metrics
The best solutions create simplicity from complexity. Assuming that successful innovation results from the synergies between complementary success factors, it is important to address these by:
- Creating a “family of metrics” for ensuring a well-rounded portfolio of measures
- Including both “input metrics” and “output metrics” to ensure measures that drive resource allocation and capability building, as well as return on investment
A “family of metrics” ensures a portfolio of measures that cover the most important innovation drivers. The following are the three categories to consider for any metrics portfolio:
Return on Investment Metrics
ROI metrics address two measures: resource investments and financial returns. ROI metrics give innovation management fiscal discipline and help justify and recognize the value of strategic initiatives, programs and the overall investment in innovation.
Organizational Capability Metrics
Organizational capability metrics focus on the infrastructure and process of innovation. Capability measures provide focus for initiatives geared toward building repeatable and sustainable approaches to invention and re-invention.
Leadership metrics address the behaviors that senior managers and leaders must exhibit to support a culture of innovation within the organization, including the support of specific growth initiatives.
Within each of these categories, there are “input metrics” and “output metrics”. Input metrics are the investments, resources and behaviors that are necessary to drive results. Output metrics represent the desired results for the metric category.
Procter & Gamble, for example, uses an organizational capability input metric focused on “the percentage of external sourcing of ideas and technology” as a way to drive its Connect and Develop strategy for open innovation. In 2000, 10% of the company’s R&D was outsourced – today, 50% of all ideas and technology come from the outside.
Key Input & Output Metrics
The following are the key input and output metrics for each category. These illustrations are not meant to be exhaustive but rather provide an initial list of options for those looking to instill metrics within their own organizations.
- % of capital invested in innovation activities such as submitting and reviewing ideas for new products and services and developing ideas through an innovation pipeline
- Percentage of “outside” vs. “inside” inputs to the innovation process (open innovation)
- Number of new products, services, and businesses launched in new markets in the past year
- Actual vs. targeted breakeven time (BET)
- % of revenue/profit from products or services introduced in the past X years
- Royalty and licensing income from patents/intellectual property
- % of employees who have received training and tools for innovation – e.g., instruction in estimating market potential of an idea
- Existence of formal structures & processes that support innovation
- Number of new competencies (distinctive skills and knowledge domains that spawn innovation)
- Number of innovations that significantly advance existing businesses
- Number of new-to-company opportunities in new markets
- % of executives’ time spent on strategic innovation versus day-to-day operations
- % of managers with training in the concepts and tools of innovation
- % of product/service or strategic innovation projects with assigned executive sponsors
- Number of managers that become leaders of new category businesses
Driving Innovation Metrics
Creating and driving the effective use of innovation metrics goes beyond simply defining and communicating new measures. Creating innovation metrics requires a strategic and disciplined approach that starts with the enterprise growth strategy and cascades throughout each business unit, division and group structure. By establishing a “family of metrics” that support the collective innovation imperatives of firm, business leaders can drive return on investment, organizational capability and leadership behavior at multiple levels of the organization.
Using metrics to drive and assess growth is not a one time exercise. As an ongoing tool for innovation management, the approach involves:
Planning: Involving key stakeholders in the identification of metrics to insure the assumptions about the sources of value are explicit and clear, and metrics align to the firm’s strategy.
Monitoring: A way to track metrics against goals to gauge progress and define necessary adjustments to measures & strategies.
Learning: A continuous feedback loop that assesses progress, engages key stakeholders in identifying implications and new opportunities to support the firm’s metrics-driven goals.
The specific process for establishing innovation metrics can include the following steps:
- Clarify enterprise strategic business objectives
- Define innovation goals to support growth objectives
- Identify required innovation capabilities for the future
- Identify desired innovation-related leadership behaviors
- Identify organizational processes and models required to drive incremental and disruptive innovation
- Create a family of metrics that support the enterprise innovation strategy of the company
- Create cascading metrics that align business units, divisions, groups and lateral process capabilities
- Diffuse metrics to drive innovation culture via leadership communication and storytelling, training & development, innovation jams, & social networks
- Revisit and recalibrate strategies and metrics on an ongoing basis
Whatever the process used, it is critical to engage key stakeholders in defining your metrics that will guide the organization into the future. Learning loops that capture insights gleaned from successes and failures must be integrated into the approach and valued as an ongoing process. And finally, metrics shouldn’t be viewed as an end in themselves but rather an indicator of the types of strategic capabilities and behavior required of each and every employee to ensure long term success and business growth.
About the author
Soren Kaplan is the author of the award winning and bestselling book Leapfrogging and a contributing writer for FastCompany. As the Founder of InnovationPoint, he works with organizations including Disney, Kimberly-Clark, Colgate-Palmolive, Medtronic, Philips, Red Bull, and numerous other global firms. Soren previously led the internal strategy and innovation group at Hewlett-Packard (HP) during the roaring 1990’s in Silicon Valley and was a co-founder of iCohere, one of the first web collaboration platforms for online learning and communities of practice. He is an Adjunct Professor within the Imagineering Academy at NHTV Breda University of Applied Sciences in The Netherlands and sits on the advisory boards of several start-ups. He has been quoted, published, and interviewed by FastCompany, Forbes, CNBC, National Public Radio, the American Management Association, USA Today, Strategy & Leadership, and The International Handbook on Innovation, among many others. He holds Master’s and Ph.D. degrees in Organizational Psychology and resides in the San Francisco Bay Area with his wife, two daughters, and hypo-allergenic cat. For more information about Soren including his recent articles, blog posts, and keynote speaking schedule, visit www.leapfrogging.com.