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.

Open Innovators Outperform the Market by 16.9%

by Hutch Carpenter

At the Open Innovation Summit last week in Orlando, there were a number of companies there discussing their various initiatives for open innovation. What is open innovation? UC Berkeley professor Henry Chesbrough, perhaps the father of the movement, formulated this definition several years ago:


"Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology.


At the Summit, several companies expressed their growth related to and/or impact of open innovation:

• Cisco: Cisco's internally generated growth is at 5%. Its partner-based growth is 10%. #ois09


• Clorox: Clorox target for growth from innovation is 4%. Last few years around 2.5% to 3.5% = significant portion of growth. #ois09


• Royal Dutch Shell: Conser: About 40% of projects in Shell's R&D program come from GameChanger. #ois09 [GameChanger is its open innovation program]


• Rockwell Collins: Aggarwal: 75% of firms expect 40% of innovation to come from external sources by 2012. #ois09


• Hewlett Packard: McKinney: 60% of ideas generated internally. Via HP Garage. Use employee crowdsourcing to filter and refine these. #ois09

Given the way these companies described their open innovation efforts, I decided to check out their stock performance. Hat tip to Jackie Hutter for suggesting this idea.

The table below compares the 5-year performance of the companies presenting at the Open Innovation Summit against the S&P 500:



It's not a clean sweep, but most of the companies have outperformed the S&P 500 handily the past five years. While it's not all due to initiating open innovation, it appears that you can't rule out its influence on company performance.

Here's how industry consultant Stefan Lindegaard describes the open innovation landscape:

"I also argued that only about 10% of all companies are adept enough at open innovation to get significant benefits today. Another 30% have seen the light and are scrambling to make open innovation work and provide results that are worth the bother. I call them contenders.

The other 60% are pretenders - companies that don't really know what open innovation is and why or how it could be relevant for them."


Looking for growth ideas? See what the firms in this open innovators stock index are doing right.

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Hutch Carpenter is the Vice President of Product at Spigit. Spigit integrates social collaboration tools into a SaaS enterprise idea management platform used by global Fortune 2000 firms to drive innovation.