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:
- 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.
- 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?