How to Measure Innovation
Today, organizations proactively take on innovation as one of the tenets of their core business strategy. According to CB insights, 84.9% of organizations believe that innovation is very important for their business operations. However, while many organizations understand there is value in implementing innovation, they often grapple with the challenge of understanding how exactly to quantify that value and measure it effectively.
In the current state of business intelligence, we are inundated with data and metrics on product, service, and operational performance, but in this sea of numbers how do we begin to make sense of the data that is available to us? How do we successfully measure innovation?
Measuring innovation success is vital in building sustainable business value. It is not an easy task, but you don’t need a degree in analytics to understand how to create a set of metrics that ensures a well-rounded portfolio of measures. The key to measuring success relies on establishing a set of metrics that supports corporate culture in advancing strategic innovation, understands the nature of the industry it functions in, and doesn’t hinder the creative process of innovation.
Where the challenge lies
Why is it often the case that we don’t adequately measure the value of innovation?
We have our reports in hand, sifting through the numerous pages of our variables, metrics, analyses, but we still have not accounted for the different forms of value that have been created.
One of the main hindrances to measuring innovation lies in the fact that many organizations tend to focus on measuring variables that make innovation happen rather than focusing on how these variables interact with the output/results and impact of innovation over time. Some traditional metrics innovation managers rely on include:
- Annual R&D budget
- Number of patents filed
- R&D headcount or budget
- Active projects
- Number of ideas
- Revenue generated by new products
- Number of projects in the innovation pipeline
While these metrics are important for evaluating results, innovation leaders agree that they often provide a superficial view of the true value of innovation when not given enough context. In this new age of ‘open innovation’ organizations need to look at metrics that have relevance in modern business enterprise, and that can truly drive strategic decisions.
While focusing on measuring the value of innovation is important, companies need to be aware of falling into the trap of trying to measure too much. In today’s business environment, there is a big push to utilize data to drive strategic output; however, that mentality can become very counterproductive for innovation. Wasting time by measuring too much can lead to excessive activity that provides little to no value and uses resources that could be dedicated to cultivating new ideas. Innovation managers need to strike the right balance between crunching numbers and inspiring creativity.
Aligning metrics to innovation goals
It is evident that in order to measure innovation successfully we need to define a set of well-rounded metrics that provide us with a clear overview of the performance of our innovation, but we must not fall into the trap of ‘overdoing metrics’.
How do we best begin to develop our measurement strategy?
As a starting point, we need to begin by aligning our key metrics to our desired outcomes. To do so, we ask the following questions:
- What is it that we actually care about? Could it be an entry into a new market, or a creation of a service in a product-driven company, what is our end goal?
- What variables best measure the outcome of that specific goal?
- Can these measures be validated?
- How can we make sure these measures do not inhibit the creativity of our project?
The right number
So what are some key metrics that we can look at when thinking about how we can measure an innovation program? Consider looking at some of the following innovative frameworks:
R&D conversion metrics
McKinsey’s R&D conversion metrics show us a new take on measuring innovation ROI. The model looks at how to effectively combine key metrics such as gross margins, R&D, and sales from new products, to measure business units' innovation performance.
The first metric, RDP (R&D-to-product), is calculated by the ratio of R&D spend to sales from new products. This metric gives organizations the ability to to track how the R&D dollars are carrying into new product sales.
The second effective metric, NPM (new-products-to-margin), is the gross margin percentage ratio to sales from a new product. This metric gives an expression of the contribution new- product sales give to margin uplift.
By utilizing these two metrics in conjunction with each other, innovation managers can have a complete set of simple, yet effective, ROI metrics that derive the true values of innovation, taking into account both input and output variables.
OKRs are metrics that allow teams to demonstrate how they are meeting objectives set qualitatively and key results that are set quantitatively. The OKR framework encourages ambitious objectives to help challenge teams and objectives are often set on a more frequent basis to ensure that teams remain agile.
OKRs are used as a framework by some of the most innovative companies in the world.
Larry Page, the CEO of Alphabet and co-founder of Google, was quoted as saying: "OKRs have helped lead us to 10× growth, many times over. They’ve helped make our crazily bold mission of 'organizing the world’s information' perhaps even achievable. They’ve kept me and the rest of the company on time and on track when it mattered the most".
OKRs help teams set clear objectives and explicitly state what is not the focus of the project, helping teams avoid unnecessary work. They help align teams with what is most important to the company, as well as measure processes and drive innovation.
Organization capacity and leadership metrics
Innovation is about behavior. The structure of the organization, the culture it breeds, the creativity of leaders and their employees, drives innovation. It is often the case that organizations need to evaluate organizational and leadership metrics in order to understand how to create the ideal structure to foster innovation.
Key organizational and leadership metrics help analyze how the behavior of senior leaders and the organization supports a culture of innovation. These metrics can include variables such as time spent on cultivating ideas vs. the output of the number of projects managed by a leader, or successful ideas led by manager vs. successful product sales.
When evaluating organizational and leadership metrics you help build sustainable approaches to innovation.
Input and output ratio
When deciding on what variables have the most meaning in measuring your innovation projects, it is important to consider that you will always need to analyze the input with the output.
For example - it is not just about measuring the number of successful ideas; it is about understanding that number with the operational investment and total revenue.
Input metrics are centered on measuring activity and investments made into innovation. Whereas output metrics are focused on measuring the value and results that come from innovation. To successfully measure innovation, you will need to define both your input and output variables and understand how these variables interact with each other.
Give it time
Remember, innovation takes time, as does seeing how innovation performs in the market.
CB Insights reports that around 71% of companies assess innovation quantitatively but primarily utilizing short-term metrics.
McKinsey states that typically new product-sales should be measured over a five-year or three-year period depending on the industry. The timeframe you choose to measure your quantitative data should be tied into the innovation cycle of your industry. However, looking at the short-term is not fruitful in the long run and sales cycles need to be measured using yearly averages.
It is highly important to take note of this when you are evaluating time variables.
Measure innovation innovatively
Innovation is about experimentation and creativity. Measuring other business functions may be more straightforward, but with the right set of innovative measures, understanding the true value of innovation does not have to be difficult.
When you define your clear set of objectives, define the simple and effective variables that will help you evaluate those objectives you can then utilize numbers to help you drive creativity and innovation.