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Tuesday, August 11, 2009

Creating Innovation Metrics

Measuring innovation is where the rubber meets the road. While it's very easy to wax eloquent about innovation, I've found that for most companies, measuring innovation is quite a tall order. Moreover, even for those organizations that do measure innovation, are they measuring the right metrics, for the right reasons?

I've authored many previous posts on the topic of innovation, and have lectured often on the necessity for executives to completely embrace innovation as a core focus area. The power of innovation to totally transform a mediocre business into a category dominant company is really only deniable by the ignorant or the prejudiced. However even those businesses that embrace the concept in theoretical fashion can fail to implement productive innovation management programs if they do not understand how to measure its impact. In today's post I'll address how to measure innovation.

So, how do you tell if an innovation initiative is successful? According to Scott Anthony at Harvard Business Online, perceptions of inital successes or failures are often times misleading when it comes to whether innovation will be successful on a sustainable basis. To validate his assertion, Scott presents a simple case-study of two innovation initiatives and asks which one would you deem as being the most successful:
  • Innovation A: This initiative enjoyed huge first-year revenues of $200 million thanks to "a clear value proposition, clever positioning, and a strong distribution network."

  • Innovation B: This initiative offered what was at best an ambiguous business model and generated only $220,000 during its first year.

So which initiative was more successful? "It's obvious, right?" he says. "Innovation A is the winning proposition." Not so fast... Is revenue the only thing that matters? Just because something is easy to measure, and appears to be an obvious win, in and of itself this doesn't necessarily constitute a victory. Were the right things done? Were the right metrics measured? Let's see...
  • Innovation A was Vanilla Coke. "It was a line extension that largely cannibalized sales of Coke's other products," says Anthony, with the note that Coca-Cola unceremoniously discontinued the flavor only three years later.

  • Innovation B was Google. Enough said.

The Take Away: "Before making a decision about an innovation," notes Anthony, "make sure you know what type of idea you are evaluating. Then make sure you use the right metrics for meauring the success of that idea."

There is great truth in the old axiom "you can't manage what you can't measure" and perhaps nowhere is it more applicable than as applied to the practice of innovation. Let me be clear... measuring innovation is not difficult at all if you understand it. The problem lies with the uneducated managers and executives who view innovation as a vague, ambiguous, and undisciplined area that sucks time, resources, and investment without demonstrable return. While the aforementioned sentiments couldn't be further from the truth, they nonetheless represent the opinion of many uniformed people in a position of authority. They simply don't know what they don't know.

There are three CIOs in the corporate world - the Chief Information Officer, Chief Investment Officer, and the Chief Innovation Officer. Of the three I believe the one position that a company cannot due without is the Chief Innovation Officer. As with any other important discipline, your enterprise needs to place someone in charge of innovation. Without a dedicated innovation champion it is likely that your initiatives will die a slow and painful death. Furthermore your CIO needs to be set up for success and not failure. This means that he or she must have total buy-in from executive leadership that innovation is a corporate mandate and not a corporate albatross.

Let me attempt to simplify what many strive to make complex. Innovation is simply a philosophical mindset that is used as a catalyst to accelerate growth and efficiency. It is a business driver and nothing more. However the reason innovation is one of the most powerful business drivers is simply because it is a disruptive, high velocity, and high return discipline that can create a much greater impact than other drivers.

The truth of the matter is measuring innovation is as simple as aligning your innovation initiatives with your business objectives. While innovation can be measured in many different ways, the following bullet points will give you examples to use when framing your metrics and analytics:
  • What to Measure: Focus on measuring the things innovation is designed to impact: process, growth, differentiation, and profitability.

  • Innovation as a Percentage: Measure the trends. Look at the sales growth or contribution margin caused by products or services launched within the near term (i.e. past three years) as a percentage of the overall line item. The greater the influence of innovation as a growing percentage of the whole category being measured, the more healthy, vibrant and sustainable your enterprise is.

  • Track Efficiency Gains: Measure speed to market, milestone hit rates, benchmark productivity, and other metrics designed to measure innovation's impact on process and efficiency.

  • Track Competitive Separation: Measure how innovation is impacting win/loss ratios, changes in market share, increases in brand equity, competitive differentiation and other competitive metrics tied to innovation initiatives.

The bottom line is that most of the current market data indicates that companies that embrace innovation as a key business driver are the fastest growing and most profitable companies in the market. Businesses that use innovation to create, disrupt and disintermediate will attract the best talent, have higher brand loyalty, and have the best chance at long-term sustainability. Don't hesitate. Innovate!

Mike Myatt, is a Top CEO Coach, author of "Leadership Matters...The CEO Survival Manual", and Managing Director of N2Growth.

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Anonymous David Phipps said...

Like the CIO comparisons but have to dig into "Let me attempt to simplify what many strive to make complex. Innovation is simply a philosophical mindset that is used as a catalyst to accelerate growth and efficiency. It is a business driver and nothing more."

How do you apply this simplified understanding to social innovation? How does research inform decisions about public policy and professional practice? How do we create change without innovation which is clearly more than just a business driver.

David Phipps

5:58 AM  
Anonymous David Locke said...

There are two types of innovation: continuous/sustaining vs. discontinuous/radical.

Christensen pushed the idea that a separate organization is a necessity for discontinuous/radical innovation. This separation is due to the need to start with a zeroed cost structure. Policy structure drives cost structure.

Metrics are part of that policy structure. Metrics are part of that cost structure.

The poor business case you mention is bad because it is being looked at with the same basis of a continuous/sustaining innovation. The two cases should be evaluated differently.

Both business cases are a necessity. At the transition into the late market, the firm must have another technology in the tornado, or its stock price will fall. Many software companies die a few months beyond this transition. Cost management won't save the company.

Innovation metrics can be reused, but they cannot be reused if they evolved across the market transitions in Moore's technology adoption lifecycle. This suggests that each market transition should have its own organization and metrics.

6:22 PM  
Blogger Flávio Pimentel said...

Very interesting post as well as comments. I believe that even some bullets were indicated by the author, i think that their adoption may very not only of the object of innovation but also of a mix involving market and organizational issues. Depending of how you conjugate this variables and associate them with the priorities of the company and its relation with market, you may have success or a disater to promote innovation.

5:36 PM  
Anonymous Yoni Stern said...

Agree that innovation is not the goal, but the means to achieve a true business or social goal. Innovation is about "thinking and acting differently in a useful and effective way". This can and does apply to both business and social causes. For Amnon Levav's opinion on how to measure innovation, visit this blog post: http://www.sitsite.com/blog/2009/07/measures-metrics-mess/

12:03 AM  
Blogger James said...

Great points. While all the metrics mentioned above have considerable value, they seem to focus on only the gains in profitability and efficiencies of the organization or department as a whole. An individual in one of the three CIO roles should also track metrics to monitor the health of their innovation program. I would want to make sure I was using a process or a software tool that would know if all are functions participating in our program, what actions or incentives were contributing towards increased participation, the quality and quantity of my community's content, and how effectively my team was pushing our ideas through our innovation pipeline, just to name a few. Having a better handle on metrics such as these will help you fine tune your initiative to ensure that the profitability and efficiency results are maximized.

James Pasmantier

1:58 PM  
Anonymous K Soper said...

Great discussion. As I research more about innovation management two things come to the top. One is the definition of innovation. Innovation can mean very different things to different people. It helps if the definition is made clearer at the start. The second thing that comes up is the metrics. How do you know when you are innovative. Patient measure has been used, but may not relate to the bottom line of the organization. How many great ideas just are not supported by the organization and then 'fail'? Measurement and buy in across boundaries is key.

1:08 PM  

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