3 Strategies for Measuring the Impact of Innovation
For today’s leading companies, innovation is no longer optional. The imperative to transform your offerings while simultaneously driving productivity and cost savings continues to grow more urgent as the pace of technology accelerates. But while innovation is a key component of any modern business plan, it also enjoys a singular status among most organizations’ critical strategies: it’s the only one that is not consistently and rigorously measured.
In a world overflowing with data, few businesses have deciphered how to apply analytics to one of their most important functions. In fact, while many corporate leaders rate innovation as a top three business priority, few even set innovation performance metrics – let alone follow through on them. Innovation gets a pass. It feels intuitively unmeasurable, fueled by amorphous concepts like ideation and creativity. But like any creative process, success requires discipline.
Peter Drucker’s oft quoted adage has never been more true: you can’t manage it if you can’t measure it. If there is budget dedicated to innovation but the outcome is not being measured, the potential for value realization is dramatically reduced. Unmeasured innovation initiatives risk being amongst the first budget items cut during cost reductions. The lack of accountability limits urgency. With no insight into inputs and outputs, and how they align with overall business strategy, justification proves almost impossible.
Of course, there is a reason that few organizations attempt to measure innovation: it is easier said than done. In truth, it is a “fuzzy” concept. But that does not mean that innovation cannot be measured, simply that we must go about it in a different way. Consider these three strategies.
1. Measure the entirety of the innovation effort, not individual projects.
Failure is part and parcel with innovation; it’s part of what makes the process so valuable. We often learn more from projects and ideas that did NOT work than from those that did (and the successes are typically predicated on a whole host of previous failures.) Some projects will, and should, fail. Risk is inherent to innovation. If nothing fails, not enough risk is being taken and there almost certainly is opportunity being left on the table.
Instead of focusing on the outcome of each separate idea, some of which will certainly fail, up-level your metrics to the overall program. These may include:
- Revenues from new products or services introduced in the past X year(s)
- Revenues from products or services sold to new customer segments
- Percentage of existing customers that trade up to next-generation products or services
- Royalty or licensing revenue from intellectual property
Some experts recommend using an aggregated “return on innovation investment” KPI to analyze similar concepts. The subdivided version includes:
- Innovation magnitude: financial contribution/successful ideas
- Innovation success rate: successful ideas/total ideas explored
- Investment efficiency: ideas explored/total capital and operational investment
While this model is not without its challenges – capturing the total number of ideas, for instance, and defining the meaning of “success” – it provides a solid framework for isolating a small number of meaningful KPIs.
2. Measure end-user outcomes as well as top and bottom line numbers.
The examples above work because they connect results to numbers. Instead of setting a goal for innovation to increase revenue, look at the user outcomes that drove the increase, such as new product sales, new market expansion, or new internal efficiencies.
You may, for instance, measure the success of your innovation program based on its impact to your Net Promoter Score (NPS). But what does it mean if your score goes up? Yes, more customers would refer others to your company, but how do you quantify that value? Consider instead how your NPS affects the average life of a customer and how much value, in dollars, that loyalty and those referrals deliver to the company.
3. Measure the culture of innovation as well as the impact of innovation.
Successful innovation never happens in a vacuum; it is the product of a very specific company culture. The behaviors upon which that culture is built must be measured in order to encourage, support, and reward them. Some of these behaviors span industries, such as ensuring that employees have the time and resources to focus on ideas and projects outside of their daily responsibilities. Some will be specific to your organization, and your measurement criteria should reflect that.
Depending on your focus, KPIs for measuring the health of your innovation culture could include:
- Percentage of employees’ time dedicated to innovation
- Percentage of company funding allocated to “game changers” vs. incremental product or service improvement
- Number of ideas turned into patents by employees
- Number of teams that submit projects to innovation awards
- Involvement of customers in the ideation and innovation process
- Number of projects “killed” (in order to evaluate how comfortable your employees are with taking risk. Counterintuitively, you want this to be high.)
Innovation not only can be measured, it must be to yield success. With metrics that prove the financial benefit, end-user interest, and internal cultural impact of your innovation programs, you are empowered to understand and demonstrate their worth. Yes, innovation offers a unique measurement challenge. But with thoughtful, strategic KPIs, its ultimate value will become crystal clear.