Innovation a Top 3 Priority - What about Metrics?

by Yann Cramer

According to yearly McKinsey surveys, innovation is one of the Top 3 priorities for around two-thirds of companies. It is a critical enabler of differentiation and growth. To create a sense of urgency, align individual performance contracts, and convincingly communicate with investors about innovation, companies need to assess the effectiveness of and return on their innovation investment.

A question I am often asked is:


"Sure, but what metrics can we actually use?"


Looking at it from the investor's perspective, outcome-oriented metrics focus on what innovation delivers to today's and tomorrow's bottom-line and, from there, to shareholder value:

• Revenue growth from new products/services
  
• Customer satisfaction with new products/services
  
• Return on investment (ROI) in new products/services
  
• Percentage of sales from new products/services
  
• Number of new products/services launched

What new is

For most of these metrics the company has to define what "new" means, in other words set the time period following launch during which the product will be regarded as new. Such time period may vary considerably by sector, as a function of the typical development time of products and their typical longevity in the market. For example, a pharmaceutical company may consider a product to be new up to 5 or 10 years after its launch, while a consumer-electronics company will probably regard a product as no-longer new after 1 or 2 years.


What is new

More fundamentally, the company also has to define what is new. Measuring revenue of new products and services comes straight out of the basic Management Information system. But innovation can be about process (eg a cheaper way of sourcing/manufacturing a product) or about business model (eg Apple's shift from just selling devices to selling devices and content such as music or books). Setting up the system to apply the above metrics to process innovation or business model innovation will usually require some work, but it is essential if the company wants to:

• Harness the value-creation potential of staff that are working outside the product development/marketing/sales circle (they too can create shareholder value!)
  
• Be mindful of radical innovation opportunities that new business models often provide

Driving innovation

As in most activities, there are also useful process metrics to track in order to provide levers on the outcome-oriented metrics. R&D spending as a percentage of sales will provide a measure of the investment in innovation and sustainability. It is also one of the few ratios that is typically not too difficult to benchmark against competitors.

Other process metrics include:

• Number of ideas in the pipeline
  
• Number of ideas sourced from outside the organisation
  
• Number of products/services in each stage of the idea-to-commercialisation pipeline as a percentage of the total number of ideas in the pipeline
  
• End-to-end time-to-market
  
• Time in each stage of the pipeline

These indicators will be useful to identify where the blockers are be in the pipeline and provide managers with insights into how they can make the innovation process more fluid and fast.

McKinsey Global Survey Results about assessing innovation can be found at McKinsey Quarterly.


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Yann Cramer is an innovation learner, practitioner, sharer, teacher. He's lived in France, Belgium and the UK, he's travelled six continents to create development opportunities with customers or suppliers, and run workshops on R&D and Marketing. He writes on www.innovToday.com and on twitter @innovToday.

Floating Storage

I came across an interesting article highlighting that the global power consumption of the data centers comprising the Internet consumed 1 percent of the world's electricity in 2005. The growth in broadband and multimedia usage would put the 2008 number closer to 2-3% of the total by my estimation. According to McKinsey, the carbon footprint of the Internet will be larger than that of air travel by 2020.

The other focus of the article was how:

- Sun Microsystems is putting a data center in an abandoned coal mine to cut electricity costs in half of what the would be at ground level
- Microsoft is investigating putting data centers in the cold climate of Siberia
- Google is investigating the creation of "data barges" that would utilize wave energy and escape property taxes by being stationed seven miles offshore

It is good that big data center technology consumers like Microsoft and Google are looking into power conservation at the same time that hardware vendors like Sun and Intel are finally starting to pay at least a little attention to how much energy their components or solutions consume.

Now what we need is Google to combine the wave action power with solar panels on five sides and maybe a wind turbine or two on masts for good measure.

Or maybe burying them might be a bit easier...

What do you think?