Can you measure the impact from innovation?

philmckinney | February 1, 2010

Article

Measuring Innovation

One of the constant challenges for an innovator is to prove the value of their work.  Many believe that innovation and creativity cannot be measured and therefore will always struggle with getting the respect it deserves within an organization.

The perception that innovation impact cannot be measures is a myth.  At the same time, its not a slam dunk either.  The challenge is getting an organization aligned on what the right metrics and measurements.

One metric that is commonly used and one that I don’t agree with is:

Innovation = R&D Spend as % of Revenue

This is the metric that Wall Street applies to most companies.  So what’s wrong with it?  Its non-predictive of future success and it doesn’t take into account:

  1. Innovation delay:  They are measuring future output of R&D spend against today’s revenue.  Any valid metric needs to ensure time scales are consistent.
  2. Revenue is impacted by a lot more than just R&D spend:  Revenue has a lot of things thrown in that are not impacted or even influenced by innovation/R&D spend.  A valid metric needs to ensure that the components of the metric is influenced by R&D.

So what are some better metrics?

The ones I like and use often are:

  • R&D Impact = Gross Margin / R&D Spend  – This is an “old” Bill Hewlett and David Packard metric they used to ensure proper return for the R&D effort being invested.  Why gross margin?  The theory is that if you build a better mouse trap, the customer will reward you with a margin premium which will show up in gross margin.  Target:  Measure your competitors and you want to be in top quartile.
  • Patent quality – Some in the industry focus on total number of patents rather than the quality of patents.  Quality is defined by how often your patents are referenced as fundamental technology in other patents (others are building ideas based on your work) and the value of the patent portfolio (how much would someone pay you for your patents).
  • % of Time Executives Spend on Innovation – The key measurement of where executive focus is to measure where they spend their time.  Does your organization do a “once a year” look at innovation or do the top executives regularly schedule sessions where they put aside tactical/operational discussions and focus on strategy and innovation?   Target: ~10%
  • Spend Of R&D – Not all R&D spend is good spend.  In many organizations, there is a tendency to over spend in the current money makers (core) and starve the new ideas.  Target:  Varies by industry but a good starting point would be 70% to the core, 20% to adjacencies (existing products/services into new markets/customers)  and 10% to new (new products/services into new market/customers).

For more background, listen to the Killer Innovations Podcast “Measuring Innovation Impact“.  It’s from 2007 but still has some good background …

The above metrics are very R&D focused and innovation is not limited to just R&D.  So, here are some questions I have for you …

What are some metrics that are not R&D focused that quantify impact?

What metrics do you think should be used by Wall Street and “management” that represents the impact from innovation?

Comments

Comments(8)

Posted by Grant on Feb 1st, 2010

A common measure used is proportion of revenue from products less than X years old. X is usually 2 – 3 years.

The major problem with this method is arguments over what is a “new” product.

Posted by Can you measure the impact from innovation? « Diageo Islander on Feb 2nd, 2010

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Posted by Chris Andrews on Feb 2nd, 2010

Interesting piece. I think quantifying innovation in terms of business impact will always be complicated by the fact that a company will have to integrate the new ideas with traditional business. That seems to me a problem with some of your metrics — the core definitions or clear separation will not always be clear. I also note that none of these metrics are focused on the business value you create for customers. Metrics related to how you help customers innovate, save money, or even their perception of you as an innovator would interest me.

Despite my “criticisms” (or comments), I think you are doing the right thing in 2) trying to manage innovation in a way that can be measured, and 2) pushing towards the right metrics for you organization.

Posted by Andréas Breiler on Feb 4th, 2010

Hi Phil,

This is always an interesting topic!
We wrote a piece on this in 2006 based on a BCG report, not that they are right all the time but it was a good report http://www.idelaboratoriet.com/newsletter26.asp

BR
Andréas

Posted by Mathias Nöbauer on Feb 27th, 2010

I believe that it depends on the innovation strategy of the organization which metrics should be chosen to measure the impact of innovation and how they should be implemented. Because the metrics and objectives should reflect the culture, organizational maturity, vision, mission and goals of the organization.

A little while ago I was trying to identify an “ideal” metric to effectively measure innovation performance. But since I did not come across such a metric yet, I tend to believe that innovation performance cannot be measured by the mean of ONE single metric only. Instead a (small) number of metrics should be combined to form a compound innovation measurement solution, ideally combining:
– Input, Process and Output metrics
– Qualitative and quantitative metrics
– External and internal metrics
– Financial and non-financial metrics

Some of the non-R&D-focused metrics that could be included in such a measurement solution inlude:

– percentage of sales from new products

– number of new products/service lines introduced

– number of new USPs (Unique Selling Points) introduced

– new customers gained through innovation (new products/capabilities)

– customer satisfaction with innovation activities

– number of individuals who contribute ideas to each new product

– amount and quality of customer data acquired related to innovation

– kill rates by stage (in a stage-gate process)

It’s probably hard to gather the necessary data for some of those metrics, but sooner or later we will eventually execute integrated “idea-to-cash” processes. Then we have got tons of metrics to analyze and sell.

Posted by Mehrdad Salahi on Sep 17th, 2010

hi phil;

I reckon as a manager the innovation is in practice depends on how much budget you have left to spend on new innovative project!
If you spend 90% of your total budget on discretionary tasks and request, then only 10% is left for new innovative projects in your organsation.
Therefore I would suggest to use the Budget for innovation/discretionary (10/90= 11)!
Is it what you were saying?
Mehrdad Salahi

Posted by Dennis D. McDonald on Feb 22nd, 2011

Dear Phil – thank you for this post especially the mention of how important it is to take “time” into account in measuring innovation. Clearly the impact of innovation is felt over time but, at the same time, the longer the time period, the more confounding other variables become. This gets us into the whole “traceability of innovation over time” quandary which I don’t know enough about to begin solving. Perhaps you can suggest some additional readings that address this issue of how to take time into account on measuring innovation?

Posted by Phil McKinney » How to Avoid The Mistake of Juggling Too Many New Ideas on Oct 14th, 2013

[...] Metrics. Choosing the appropriate measurements—economic vs. noneconomic, external vs. internal. [...]

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