Daily Archives: January 3, 2008

Innovation Metrics for the Chief Executive

Chief Executive recently posted an article on Measuring the Black Box that had some decent advice on the design and implementation of innovation metrics, especially considering the intended audience. In the article, the author noted that the challenge for companies seeking to improve their ability to create growth through innovation is that the metrics they use to measure innovation come with a high risk of actually leading them down the wrong path.

The author noted that managers hoping to unleash the innovative potential of the firm need to be mindful of the critical measurement traps, and that if they really need metrics, that they should think about creating a widespread set of metrics. (It also said they should ensure their executive dashboard constantly matters the innovation metrics that matter most – but I have to take serious exception about the use of dysfunctional dashboards. It’s true that executives should monitor the metrics regularly, but I think a better idea would be to, I don’t know, actually talk to the underlings.) The author then outlined three of the major measurement traps, and this was the part of the article that the doctor liked.

Measurement Traps

  • Too short a list of metrics
    The nature of innovation is that there isn’t one – or even one hundred – metrics that can capture is. (After all, if you knew how to measure it, you’d already know what it was.) Many companies often focus on a single innovation metric – such as the annual rate of return on their innovation activities. Although this is a useful historic metric, it can lead companies to inadvertently prioritize easily measurable markets over difficult-to-measure ones or short-term projects over longer term ones, when, in fact, the difficult-to-measure market, emerging market, or the idea that’s five years ahead of its time could be the one that really skyrockets the company from obscurity to the top of the Fortune 500.
  • Encouraging sustaining behavior
    Many metrics implicitly – or explicitly – encourage companies to focus on close-to-the-core sustaining innovations that promise incremental returns at best. Although they might be good, they will prevent substantial growth. And considering that Bain & Co. have found that the average business life-span is now a mere 14 years and that only one third of the Fortune 500 will get through the next decade unscathed, sustaining behavior is just not sustainable any more.
  • Focussing on inputs over outputs
    A company that tracks only input related metrics runs the risk of having resources (and scientific ones in particular) working on interesting but, ultimately, low impact projects.
       Consider the 2006 study referenced by the author that highlighted companies with the largest R&D budgets, where the leader was Ford. I’m sorry, but if they were truly innovative, they would be doing a heck of a lot better than they are. Innovation isn’t about how much money you throw at the problem, it’s about what you get in return. And that, I’m afraid, requires not only giving your people the time and resources they need to be innovative, but the freedom to be innovative.

The author then presents a balanced set of input-related, process-related, and output-related metrics for those that feel the need to constantly measure the company’s innovation-related activities, inspired by the Boston Consulting Group’s suggestion that the metrics must be balanced. Some of the metrics presented are good, some of them, not so good. Thus, in our next post, we will review each of the metrics suggested and briefly discuss their relative worth.