Measuring Innovation Performance
29 Jan 07
“Traditional measures of innovation such as market success are
significantly lagging indicators. We're interested in measures that are
timely, meaningful, and, most importantly, actionable.”
David Burrage, Motorola research portfolio and processes manager, in
Business Week, 28 April 2006
How does your
organization measure its innovation performance?
Based on
research we’ve done recently at the ICE Center, there seem to be several
common themes and issues around commercializing innovation, applying to
both new products and services.
First,
innovation effectiveness is an area of perennial concern -- senior
executives are always interested in assessing their company’s innovation
performance. At the same time, however, most companies do not have a
systematic or standard way of capturing either investments in, or
returns from, innovation. As a result, measurement of innovation
performance tends to be ad hoc in most companies, with
considerable variation in measures used from year to year.
Because
innovation performance is not measured systematically, it doesn’t play a
strong role in the performance evaluations of senior management. For
example, most senior managers have a growth target for their division or
company, and they may be rewarded based on their ability to achieve this
target. The mechanisms by which they attain this growth, however, are
usually unspecified. Thus, all growth contributes equally, whether it
comes from acquisition or from innovation.
At the ICE
Center, we’ve been looking at the ways that companies measure innovative
activities for several years. We’ve found it useful to distinguish
across three categories of measures:
1.
Results-based
measures,
which focus on
business outcomes, such as sales or profits, stock price or market
valuation;
2.
Process
measures,
which
capture the activities that contribute to these business outcomes, such
as number of projects in the pipeline, time to market, or percent of
sales from new products.
3.
Project
measures,
which
look at the returns and investments from specific innovation projects.
Measures such as “time to cash” or ROI are calculated on a
project-by-project basis;
Each set of
measures have their advantages and limitations. Here’s a brief rundown.
Results measures
– accounting for growth
Most companies
pursue innovation so that they can realize higher growth in sales and
profits – they create and launch new products, services, or businesses
which can increase revenues or margins. But innovation is just one of
many ways to get growth, so simply looking at overall growth rates does
not capture innovation’s contribution. For organizations without a
strong history of innovation, for example, growth often comes via
acquisition or geographical expansion.
Companies could
use growth accounting techniques to decompose the sources of a company’s
sales or profit growth. Economists have taken this approach in
understanding sources of growth for the national or global economy
(where they find that innovation plays a major role in contributing to
total economic growth). Companies could use a similar approach to
decompose a company’s growth into contributions from such factors as
innovations, acquisitions, and geographical expansion.
Regardless of the kind of accounting you use, as Motorola’s David
Burrage noted above, the results-based measures are lagging
indicators of innovation capability – they show the results of a
company’s past efforts, but don’t provide good direction on the kinds of
activities companies should undertake to get to these results.
Process measures
– leading indicators of innovation performance?
Wouldn’t it be
great to have a few leading indicators of innovation performance
– measures that could tell you how the company will be doing in the
future, rather than being a reflection of the past?
Process
measures, which look at innovation activities within the organization,
may provide some of these leading indicators. Here are a few types of
popular process measures:
Ø
Number of innovation projects being undertaken;
Ø
Average time to market;
Ø
Number of patent applications per year;
Ø
Percent of sales from new products or services.
The assumption
underlying process measurement is that doing the right activities will
lead to improved business results. The problem, however, is that it’s
difficult to find the right activities to measure as the right leading
indicators.
And putting too
much emphasis on process measures often leads to counter-productive
business results. For example, measuring the percent of sales from new
products or services rewards product churning -- the substitution
of a new product for an older product that may not have needed
replacement. The new products substitute for the old, generating
expense without adding any revenue. When this happens, new products can
actually contribute to reduced profitability.
Project Measures
– returns from specific projects.
Project measures
are especially prevalent in industries, like pharmaceuticals, where
innovative efforts are undertaken in large and discrete projects.
In these
situations, there are a number of tools that can provide a measure of
project-based innovation performance. In their recent book Payback,
BCG consultants Jim Andrew and Hal Sirkin describe the “cash curve” for
different kinds of projects. This builds on the “breakeven time”
concept first developed by Hewlett Packard in the mid-1980s. In both
measures, the idea is to minimize early investment and maximize cash
returns.
It sounds
simple, but it’s surprising how many major innovations become cash
traps. Andrew and Sirkin highlight such products as TiVo, Motorola’s
Iridium Satellite Phone, and the Supersonic Concorde as innovations
which had a small chance of success from the start because of the high
upfront investments required. On the other hand, Apple made a number of
decisions in its iPod development that created the conditions for an
extremely profitable new product.
Project measures
tend to treat each innovation as a separate business, and measure
returns on that basis. For most companies, however, innovation projects
are embedded into departments that have many other responsibilities as
well, like marketing, engineering, or sales. In these situations, it’s
both impractical and inaccurate to allocate shared investments between
projects.
All three kinds
of measures have their advantages and their drawbacks. Many experts
recommend using a dashboard or scorecard that contains a combination of
results, process, and project measures. The situation for most
organizations currently, however, is a much more ad hoc approach
to determining the metrics of innovation success.
How do you
measure innovation performance? Drop me a line if you’d like to discuss
your approach – we’re collecting information for our next Idea-to-Profit
Summit in May.
More
Information:
-
If you’re
interested in the way innovation is measured in economies, rather
than companies, Gavin Cameron, of Nuffield College at Oxford
University, provided a survey of Innovation and Economic Growth.
That’s available
here.
-
In December
06, the US Department of Commerce
launched an industry/ academy effort to look at the way we
measure innovation in the US.
-
Business
Week did several articles on company measurement do’s and don’ts.
Here’s one of
them, from which I took the Motorola quote above.
-
The book
Payback by Andrew and Sirkin is available from Amazon
here.
