Innovation has become one of the most critical components of any business but it is also one of the hardest to pull off. As a result, one of the major issues being tackled by innovation practitioners is how to measure innovation and motivate the organization to deliver across all stages of the process. There are two well recognized methodologies that attempt to measure Innovation and both have their challenges
The first one is the more famous though questionable Forbes methodology that calculates innovation premium by projecting a company’s income from its existing businesses compared to the net present value of those cash flows. However, this is not without its shortfalls where only companies with a market cap of $10 billion or more as well as companies with a certain threshold for R&D spending as a percentage of sales are eligible. The link below provides more details on the Forbes methodology:
How we rank the world’s most innovative companies
On the other hand, Boston Consulting Group’s rankings are based on a survey of 1,500 senior executives based on respondents’ picks (weightage of 60%) and five-year growth in total shareholder return (TSR) [weightage of 40%]. This takes a more subjective look at innovation whereas the Forbes methodology is completely objective though proprietary. Asking executives apart from looking at the total shareholder return (when measured over the longer term is one good measure of the outcome of innovation efforts) may again not be a full-proof method of measuring innovation.
BCG perspectives – Innovation in 2015
Although these external indicators provide a direction of innovation performance, it is imperative that companies define and measure their innovation performance within their organizations. In today’s global environment where product life cycles are rapidly diminishing, disruption of industries are common and there is increased competition in a borderless world, the measurement of innovation will become a defining metric of a company’s survival and growth. Some of the leading companies have now established good metrics for innovation and these are reported to the Board. In fact, we believe that the measurement of innovation should be reported in the Company’s Annual Report and it should go beyond just measuring the expenditure of R&D.
Although there is no generic list, few internal measures of innovation do exist inside of companies in some form and have been in widespread use for many years now. Further, it is important to note that these measures needs to evolve in a manner it becomes relevant for the organization. These measure will continue to change and eventually they serve a dual purpose: of driving behavior of individuals or teams in an organization to be more proactive on innovation as well as tracking progress throughout the innovation journey and course correcting wherever necessary. These measures are of effectively three types namely Input, Process and Output metrics. The metrics at the Input and Process level are also termed as Lead whereas those at the Output level as Lag metrics. Input metrics are those which set the pre-requisites for successful innovation. They can be measured in terms of money, talent and time devoted to innovation. For e.g. the amount of leadership time spent on innovation, fraction of budget invested in innovation projects, to name a few. Process metrics are those that affect the movement of ideas through the innovation pipeline. Examples being the fraction of ideas moving forward in the innovation journey or the average time taken from idea generation to first successful commercialization. Finally Output metrics are the result of the innovation journey. Typical examples are the number of new products launched, sales from new products/services/business model or the ROI on innovation spending.
How does an organization go about putting up a system in place for having the right innovation metrics? A simple yet effective framework for innovation measurement in business can have the following steps:
The fact that innovation is in its’ infancy and not as much a defined science as financial reporting, it still needs to evolve and hence the challenge will remain with organizations at this stage in making this process robust. The measures that are selected will need to have a balance between lead and lag and will also be dependent on the culture of the company and the maturity of their innovation capability. So while a company like Google measures that 10% of employees’ time is dedicated for experimentation with new opportunities, 3M tries to mandate that 35% of the corporations’ revenues should come from products introduced within the past four years. Likewise, organizations will need to assess their purpose in order to put the right metrics in place.
Further, although some of the measures and corresponding metrics mentioned above can be very insightful, measuring innovation is still at a nascent stage with no standardization. As a result, companies will measure innovation differently going ahead. However, over a period, a list of lag metrics will emerge just as we have seen a standard set of financial metrics getting reported in annual reports. Leaders who commence this journey will have a clearer understanding of what are the important metrics relevant for their organizations. Till such time, for any organization, it becomes critical to assess where it stands in its implementation of Innovation as well as its existing culture. This assessment will allow it to examine what kind of measures are required and what metrics can be put in place. After all, what gets measured gets managed.