Sunday, July 12, 2015

Innovation Measurement: How to Do it Right?

The measures should be oriented to justify innovation organization is needed.

Innovation is the light every organization must pursue now, but most of the innovation initiatives fail to achieve the expected result. Druck is credited as saying: “We can only manage what we measure.” What is stopping you from measuring top line impact from innovation, how much revenue is generated by innovations launched in the last 5 years? Are innovation failures caused by the time lag, inefficiency of financial systems? Is your innovation process not so clear with limited information on what has been done, or something else for ineffective innovation management, like a fuzzy or not well-communicated strategy goals? And innovation measurement, how to do it right?

The measures should be oriented to justify innovation organization is needed: The problem is often that the initiative is not well defined. Without well-defined goals, you won’t have the effective plan and enough time to generate results. So, it is difficult to measure the impact without taking the time to generate impact. The approach is that the impact is generally equitable to the size of the problem the innovation is addressing. The larger the challenge, the easier it is to see the impact. Better look at what the results were prior to implementing the innovation and after. Of course, there are other dependencies, which one must assess more clearly. Asks key questions around innovation strategy, capacity, and discipline such as:
Strategy - Do we know "Why Where When" to innovate?
Capacity - Do we have the Processes - People - Resources to drive ideas to commercialization?
Discipline - Do we have the Leadership- Behavior- Metrics to finish what we start?
The set of questionnaires helps a great deal to outline the total system at work in an enterprise that accomplishes new product innovation. Without this system perspective, it is difficult to identify the most critical performance indicators, and the likelihood of sub-optimizing various parts of the system is high. When this occurs, the risk of actually degrading overall system performance is very real.

There is no best practice solution which fits all cases: Normally organizations look for KPIs measuring business results generated by innovation efforts. But it takes quite some time for a new innovation drive to produce those measures. One of the solutions is to define process KPIs, which demonstrate the growing capability of the organization to deliver more innovation with business impact in the future. You choose those KPIs by deciding which are seen as critical to making progress on in order to deliver more innovations. The fewer the better, but they have to be credible and relevant also in the eyes of the stakeholders. For example, culture is a perfect (sometimes it gets even too complicated) metric system to measure the impact of innovation on the business in order to unleash more successful, transformational innovations.

The impact of innovations on enterprise performance ranges from effects on turnover and market share to changes in productivity and efficiency: The productivity effects of innovative activities have been one of the most challenging issues in empirical economics for several decades. The majority of studies on the relationship between innovation and firms’ economic performance uses the production function approach, where different measures of firm performance (mainly productivity) are explained by several independent variables such as physical capital, human capital, R&D and other innovation-related investments as well as firm size. The innovation studies in recent years showed that the innovation success rate is not proportional to the amount of R&D investment, which means the more money or resource you pour into the innovation initiative does not guarantee the higher ROI from innovation effort.

Setting guidelines for developing a customized suite of innovation metrics: Select the few (3-5) KPIs, to keep the measures simple and understandable. There are good reasons to focus on top line vs bottom line. The innovation metrics in the context of business impact include such as, % of revenue from new products introduced. You could also change the variables and create something like % of the profit from new ideas implemented. Some choose innovation process KPIs, process KPIs could link to strategy, to make progress on the percentage of projects in the total innovation portfolio which contained a major part of external innovation. You may compare, focus on high growth markets with high margin solutions before and after implementation of the new innovation process. You may need a simple portfolio management tool and process to achieve this. The share of wealth is another interesting one to measure the change in company market value during past year divided by the change in the total industry’s market value. You may consider your company as innovative, but what about your competitors/ rivals/ new entrants if they are more innovative. The goal for measurement is to create new revenue and drive early success to create a positive spiral. The change in the value of innovation projects portfolio (value of your development pipeline) and distribution of your portfolio in terms of incremental vs disruptive, local vs global, core vs far from core industry, small vs big investment, offering- production- delivery- customer experience, competitive (own resources) vs. collaborative (partners) etc., is depending on your strategy. The increase in the contribution of partners in your portfolio is the main goal of an open innovation initiative. And some say each successful innovation needs, at least, nine failures - measure the failures. If the organization allows these nine failures - it will be successful in innovation!

All innovation initiatives, hopefully, are started to achieve some business result directly or indirectly. Just measure that result. To better align innovation management with strategy, organizations must develop a Scorecard to justify the initial investment in the program and the initial results (intangible and no concrete, of course) more than to measure financial results. And always keep the measurement simple, understandable and understandable.


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