Innovation: What are the real metrics?
Knowledge management systems frequently include performance measurementas an integral component; for example, business process management (BPM) systems provide metrics that offer critical insights into process efficiency. Key performance indicators (KPIs) such as revenue are often displayed on dashboards to keep executives up to date on enterprise performance.
One business activity that has been difficult to measure, however, is innovation. Many factors contribute to the challenge of measuring innovation. One is the widely divergent nature of innovation in one industry versus another. Manufacturing process innovation does not resemble the innovation in customer service that has been enabled by mobile devices. In addition, there is usually a time lag between the innovation and seeing results, which impedes making clear correlations.
A surprising number of companies do not have formal methods for evaluating the impact of innovation at all. “Many business models under which organizations operate do not truly accommodate the requirements for today’s knowledge economy,” says John Lewis, founder and president of Explanation Age, a knowledge management consulting firm. “They do not incorporate the learning cycle or the process of innovation, and without a valid model, metrics are difficult.”
Innovation is now a mandate in nearly every industry, however, and with billions being spent on R&D each year, the pressure is on to prove that the investments are having an effect despite the difficulty of finding meaningful metrics. Methods of obtaining metrics are in fact available, each of which has its strengths and weaknesses. The metrics can come from existing information systems or can be developed by specialized software that collects new data. The real challenge is not in getting the number but in thinking through which ones are true indicators of innovation.
Some metrics can be obtained from enterprise resource planning (ERP) systems. The R&D budget, either in dollars or as a percent of annual revenue, is one example. Those figures can be compared to industry averages to determine how a company stacks up against its industry peers. Another commonly used metric for innovation is the number of patents filed each year. The assumption is that the intellectual property represented by the patents will eventually be reflected in new products and new revenue.
While those measures both have value, neither dollars spent on R&D or patents filed actually measure innovation performance. They are both input measures that track investment, as opposed to output measures that demonstrate results. A better metric is the dollar value of new product sales or the contribution of new products to profits, because they are output measures that indicate the effect of R&D activities.
The example of mobile technology shows how some simple metrics can indicate the impact of innovation. Many companies have used mobile technology to provide totally new processes and services, and the impact of those can be identified. “Mobile technology can unlock a lot of process innovation,” says Glenn Gruber, senior mobile strategist at Propelics, which helps companies develop mobile strategies. “There are so many new ways to collect data via sensors in the device that were either unavailable to the user or can now be captured without any manual intervention, improving worker productivity, satisfaction and data accuracy.” The business impact of the availability of data that was not previously available can be measured in terms of incremental services or reduced cost of collection.
The financial impact of new mobile services being provided by banks can be measured in numerous ways, including reduction in cost because fewer tellers are required in banks or new customer acquisition. The measures help companies assess the value of their development costs for offering the services. “Hotels might show increased on-property spend by customers because the hotels can present services on customers’ mobile devices at the exact moment that they might need them,” says Gruber. “Wisely used, these innovations can change the face of your business.”
Measuring the differential impact is much more important than figures such as R&D expenditures, Gruber believes. “R&D as a percent of revenue and number of patents are often used, but neither one is assured of having a positive effect,” he says. Gruber leans toward a measure called the Vitality Index, which determines how much of revenues are driven by products or services introduced in the past year. “The more recent products and services also tend to have higher margins, which supports better prospects for growth and profits,” he explains.
Ideas are the source of innovation, and numerous software solutions are available that capture ideas and manage the evaluation of each one. Some of the products have workflow that can also route the ideas to specialists as needed. They are often used to extend the range of employees from whom ideas are obtained beyond the R&D department, and to obtain ideas from customers and partners. Choosing a topic for ideas allows the organization to focus on specific issues in a campaign-oriented mode.
The usual result is that the quality and quantity of ideas is increased, and the review process becomes more systematic. Each idea can be rated, which allows prioritization. A feedback allows participants to find out the results of the evaluation and whether the idea was implemented. The tools can also provide metrics such as cost savings or increases in revenues that can be attributed to the ideas, although they may be estimates.
A positive aspect of idea management products is that they are applicable both to internal innovation and to product innovation. A drawback is that they are often standalone tools that are not well integrated into other information management systems. Therefore they may not be able to provide the more robust measures of success that are needed to validate the impact of the ideas. Nevertheless they represent another source of information about how vibrant innovation is within an organization.
Project and portfolio management
Project and portfolio management (PPM) software helps organizations select the projects that best match their strategic goals and have the greatest likelihood of success. The software also provides the structure for the systematic control of each project from inception to completion. Typically the projects move through a series of Stage-Gates (also referred to as phase gates) at which formal decision criteria are applied before the project can advance. A primary purpose for the software is to manage innovation by allocating resources to the most promising new product development (NPD) projects in a way that streamlines their delivery. The products also have metrics that evaluate the performance of the projects after introduction.
“But the important thing to remember is that, for most companies, innovation is the
means to an end, not an end in itself, and therefore the most important metric is the contribution
innovation and product development make to their business growth.”
Innovator PPM software from Bubble Group provides visibility into the NPD pipeline, with real-time metrics on each project or aggregated data and roadmaps for strategic planning. Customizable dashboards show key metrics. “Innovator grew out of our consulting activities,” says Peter Hoyland, director at Bubble. “It is based on best practices such as phase gate theory, lean thinking and open innovation principles. We also designed it to be very intuitive so that users could quickly become comfortable with the product with almost no training.”
One differentiator for Innovator is that it is embedded into the day-to-day processes of product development teams rather than being primarily an aggregator. “For example, there might be a criterion on a research project that asks the researcher to identify a development project that would benefit from the research,” Hoyland says. “The classic problem is that research can lose touch with more market-driven development. Our software will pick up on that.” The approach helps form a link between the research team and the development team to help ensure that innovations will be commercially viable.”
However, return on investment (ROI) is not necessarily the most important criterion, according to Hoyland. “Predicting ROI and picking a project based solely on its high ROI forecast is a bad idea if it ignores the issue of how the project fits into the company’s strategic plan.” Hoyland advises companies to put projects on a roadmap that identifies the market that would be addressed in five years, along with the technologies they need to create those projects and the skills needed to support them. “Having a vision for innovation is as important as collecting the numbers,” he adds.
Innovator also includes metrics designed to determine whether the company is being sufficiently innovative. “These metrics range from simple project characterizations such as incremental vs. substantial vs. transformational innovation, through classic two-by-two matrices showing business process innovation vs. product innovation, as well as leading indicators such as patents,” Hoyland explains. “But the important thing to remember is that, for most companies, innovation is the means to an end, not an end in itself, and therefore the most important metric is the contribution innovation and product development make to their business growth.”