Daily Archives: December 1, 2006

Measuring Innovation

One of the results of the Boston Consulting Group’s Innovation 2006 survey and report that determined that 72% of executives consider innovation a top-three strategic priority was that only 52% of the respondents considered their company’s innovation capabilities to be superior to that of their competitors. This is probably correlated with the fact that only half of the respondents said their companies use metrics to assess the performance of their innovation processes. After all, how can you judge what you can’t measure? (Furthermore, Boston Consulting Group found that among companies that do use metrics, most use only a handful.)

This could be because many companies find it difficult to manage the innovation-to-cash process. There are ways to do this, and one methodology, as provided by the report, is the cash curve of an innovation (which depicts the cumulative cash investments and returns for an innovation over time). The information that goes into the curve isn’t perfect, but it does bring out the many implicit choices, assumptions, and decisions that management teams make out in the open and fosters discussion. Furthermore, it forces you to collect and maintain data, which is necessary for the development of metrics.

What metrics should you use? The Boston Consulting Group also produced a companion report, Measuring Innovation 2006, that provides some insight. According to the report, the three metrics that the executives considered most valuable were time-to-market, new product sales, and return-on-investment, but these are only good for measuring the end result, not the intermediate artifacts of the process.

Fortunately, the report also provides you with other possibilities that you can use. Breaking innovation down into inputs refined by a process that produces outputs, the report suggests the following metrics.

For Inputs:

  • Financial resources committed
  • People and Utilization
  • The number of ideas generated and expected payback for each
  • Key capabilities

For Processes:

  • Resources extended per individual project and on-average
  • Cycle times for the entire process and specific parts
  • The number of ideas moving from one stage to the next
  • The difference between the initial expected value of an idea and the actual realized value

For Outputs:

  • The number of new products or services launched
  • Incremental gains in revenues and profits
  • Cannibalization of existing product sales by new products
  • The ROI of your innovation activities

In other words, you have options beyond the basics, and you should use some of them. The report indicates that the ideal number of metrics across all three elements of innovation is between 8 and 12, and I would bet that 9 would be a sufficient starting point. As for what metrics you choose, it’s really not that important. What gets measured, gets improved – and more importantly – understood. As time goes on you can adjust the metrics based on your experience if need be, but the sooner you start trying to measure your innovation efforts, the sooner you will see them improving. The right metrics are important in the long run, but in the short term, it’s about getting there – and without effort, you probably won’t get there at all.