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Innovation Metrics The Basis for Timely Decisions |
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By Vadim Kotelnikov, Founder, Ten3 BUSINESS e-COACH – Innovation Unlimited, 1000ventures.com
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"Simplicity applies to measurement also. Too often we measure everything and understand nothing." |
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Three Primary Roles of Innovation Measurement1
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Why Innovation Metrics? You cannot manage what you don't measure. Innovation metrics motivates managers and leaders across your organization to embrace innovation broadly and give it ongoing priority. The adage "that which gets measured gets done" is no less true of the innovation process than any other. Once innovation goals are broadly communicated and rewards for achieving milestones are established, the pace of ideas to implementation accelerates. Sustainable growth is the result. Innovation metrics should be applied to the three dimensions of your innovation system - strategic planning, process, and people. Lack of Systemic Approaches "Surprisingly, with all the effort human resource professionals have put into performance appraisal, there are few systemic approaches for defining capabilities a firm needs to win and comparing them to what it has on hand."1
The five classic result measures – performance, quality, timing, financials, and development costs – tell you what happened, but don't tell you why. "For example, an 8% drop in quarterly profits accompanied by a 10% rise in service costs does not tell a customer service team what its service technicians should do differently on their next call."1 The Power of Predictive Measures Predictive measures examine the actions and capabilities that contributed to the situation. "Knowing that several new technician hires dropped the average skill level such that the average time spent per service call rose 15% – and that, as a result, the number of late calls rose 10% - would explain why service costs had gone up and customer satisfaction and profits had gone down."1 Return on Invested Capital (ROIC) ROIC is a measure of how effectively you create shareholder value to your cost of capital. ROIC helps allow you to identify your best-performing businesses and those that aren't delivering the performance they should.4
Return on Innovation Investment (R2I) Since innovation by its very definition is intangible and not easily measured at the front end (especially at the outset of a new product/service development program), "the logical place to begin is at the end - at the Return on Innovation Investment (R2I). Measuring R2I makes the intangible tangible, thus providing managers, employees and the investment community with valuable information that can be used in a number of ways."3
"Like ROI – return on investment – R2I also shows return on
investment, but only from new product innovation
investments, not all investments. It looks at the firm's total
profits from new products (cumulative new profits generated from new
products launched) divided by its total expenditures
for new products. This long-term ratio shows the firm's total return
from new products over a three- to five-year period. This number has two
uses:
Don't ignore the other measures and focus on R2I alone though. R2I is driven by all the other metrics, since all have an impact on the bottom line. Remember also, that for R2I measurement to work, the process must be applied consistently to all new products and services. Case in Point Citigroup At the heart of the Citigroup's Innovation Initiative was putting the right metrics in place. The Citibank Division already had an Innovation Index in place that measured revenues derived from new products but that was deemed insufficient. The special task force was challenged "to come up with more meaningful top-line metrics that could be used to track progress and could be integrated into the balanced scorecard, and ultimately tied to compensation of senior managers. The team eventually settled on 12 key metrics. They included such things as: new revenue from innovation, success transfer of products from one country or region to another, the number and type of ideas in the pipeline (and expected new revenues), and time from idea to profit."2
Case in Point Cargill Agribusiness conglomerate Cargill estimated its innovation gap at 10% of its entire revenue – or $5.5 billion. In response, it established an internal office of innovation. How To Succeed In InnovationGrowth Risk: "The more you measure and motivate based on innovation, the less likely you will have a truly innovative culture." – Stephen Shapiro... More
Return on Innovation Investment (R2I): Calculation Formula... Measuring Your Innovation Gap... Measuring Radical Innovation... Five Classic Results Measures To Watch... Case in Point Popular Measures Used in the Silicon Valley... Case in Point Dell Computer Corporation... Case in Point Intel... Case in Point Skandia... Case in Point Cisco Systems... Case in Point Quantum... Case in Point IBM...
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Bibliography:
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"Relentless Growth", Christopher Meyer, 1998
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"Driving Growth Through Innovation", Robert B. Tucker, 2002
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"Managing New Products", Thomas D. Kuczmarski, 2002
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"Direct from Dell", Michael Dell with Catherine Fredman, 1999
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"The Financial Implications of the Innovation Gap," Imginatik
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"Creating a Place for Innovation," Eileen Mullin, 3 December 2002
