Measuring Innovation

Innovation management is a method to measure and manage all processes related to innovation in the company.  At that, it can be development of innovation in products and services, as well as organizational innovation.  Often, some companies are making mistakes by introducing new ideas as to products and services without introduction of new approaches and business processes.

Measuring InnovationIn other words, employees must have the necessary set of tools and organizational guidelines to complete innovation goals.  There should be also a reliable feedback system between managers, front line employees who communicate directly with customers and engineers/specialists who develop new products/services.

The goal of innovation management is to force company to respond to internal and external opportunities and use innovative ideas, products and services to improve company position in the market, attract new customers, increase sales among existing customers, increase competitive advantage, meet customers’ and shareholders’ objectives etc.

There are two types of innovation processes: pushed and pulled.  Pushed innovation is normally based on existing technology or technologies that have been recently created, while a pulled innovation looks for areas where customers’ needs are unknown, so the solution must be found to satisfy customers’ needs.

Statistics show that ability to change and amend products and conduct in the market is the key success factor in today’s business.  That’s why innovation management is becoming increasingly popular.  Sure, implementation of new ideas is not an easy process.  Top management needs to answer several questions like “where do we find new ideas?”, “how do we select the most promising ideas?”, “how do we implement your ideas?” In order to measure innovation efficiency a detailed balanced scorecard needs to be designed.

According to recent survey by PricewaterhouseCoopers, almost half of top managers among 355 North American private companies attempt to measure innovation with a system of quantitative indicators.  The following criteria are used to measure success of innovative decisions: impact on company revenue increase, customer satisfaction, revenue increase from new products, performance improvement, profitability dynamics.  At the same time, organizations use different approaches to measure their innovative activity, and only few of them use a reliable Balanced Scorecard system which is well integrated in the strategic vision/goals of the company.

As it turned out, innovative groups whose goals can be measured receive a continuous support of the top management as compared to innovative ideas which are impossible to evaluate.  No wonder!  In order to persuade management one needs to demonstrate efficiency of innovative methods and their impact on business success.

Why should innovation be measured?

Indicators, also called innovation metrics, help analyze organization capabilities to adopt innovative decisions, as well as serve as measures of company success in this area.  Although very few companies are now using innovation metrics and their work, there are several obvious reasons supporting use of such metrics:

  • Balanced scorecard establishes formalized base (objective numerical figures) managerial decisions.  It is very important especially taking into account that most of innovative projects are quite risky and run in the long term.
  • Innovative indicators represent strategic interests of the company, which makes it possible to integrate innovation into a business processes and establish an effective feedback system between those who generate new ideas and managerial team.
  • Indicators help allocate and share resources between corporate management system and system of innovative initiatives.  Innovation metrics establishes expectation in regards to innovative potential of the company, and comparison of expected and current indicators helps reveal those innovative projects which funding does not meet established goals.
  • Innovation metrics motivates personnel and encourages initiative.  Comprehensive and ambitious goals make employees more creative.

Currently, innovation management as a corporate discipline is widely used in most companies.  One of the reasons is that companies often lack relevant experience to implement BSC and establish innovation indicators.  Today’s corporate practice usually includes such indicators as research and development budget, research and development budget vs. annual sales volume ratio, number of patents received for the accounting, number of initiatives received from organization employees.  Without any doubts, these indicators may be quite helpful but they do not fully evaluate innovating potential of a company, and thus will not be very important in strategic decision making.  For example, huge R&D budget does not necessarily mean emergence of numerous new products and services which will immediately conquer the market and become additional source of income for the company.

What is the price for innovation?

  • Outside consultants.  Support and advice from outside consultants will help shape and outline corporate innovative management system, formulate methodology, as well as find and educate a leader in the company who will be in charge of innovation.
  • Company personnel.  Perhaps, expenses for company own personnel represent the greatest part of innovation budget.  These are expenses for employees directly managing innovative ideas, payments to employees working extra time (for example, a production manager spends 10% of extra working time as innovative group member).
  • Technologies.  These are expenses related to purchase and development of software solutions used to optimize work of innovation management system.
  • Other outside resources.  There may be expenses related to purchase of specialized databases, subscription to online and printed bulletins or periodicals.
  • Bonuses.  Of course, employees should be financially motivated to generate innovative ideas.  As a rule such expenses are insufficient, but in some cases they may be quite huge, for example if an employee receives percentage from company earnings or savings which became a direct result of using innovative ideas.

Key indicators

  • ROII (return on innovation investment) is coefficient of innovation profitability. ROII can be calculated both for successfully implement projects as well as projects which are being prepared to be implemented, given that forecast of revenue growth and cost savings is made.

Financial results from innovation may be:

a)      Revenue received from sales of new product

b)      Increase of revenue you resulted in introduction all the new product to the market compared to planning variable

c)      Decrease of operational cost savings in relation to any service of the company

d)     Revenue obtained from introduction of products to new market segments

  • Revenue received from sales of new products as compared to total revenue for the last several years.  This is one of the most popular metrics used by various organizations.
  • Changes in the relative market value of the company as compared to relative growth of a target market for the last several years.  This indicator is based on the belief that innovation is a key resource of a company that makes it possible to increase competitive advantage and even be ahead of the market.
  • Number of new products, services and businesses which the company has introduced to the market for the last several years.
  • Number of innovative ideas which came from employees of the company during a certain period.
  • Ratio between total number of innovative ideas and number of implemented innovative ideas.
  • Time span between submission of an innovative idea and start of innovative project.  This indicator evaluates feedback and communication system within the company.
  • Number of customers considering your company innovative vs.  total number of customers
  • Innovation index.  Sometimes, companies designed own innovation index to which they include many of the above mentioned indicators.

Deadliest mistakes in evaluation of innovation

Many organizations consider innovation measurement to be quite a difficult process and develop own complex system of innovation metrics.  However, if company management gets carried away with this process the indicators may become abstract and lose ties with the way the company functions.
Here are five most common mistakes in development of innovation measurement system:

  • Too many indicators.  This mistake may be caused by either desire to accomplish much during the short period of time, or reluctance to get read of some of the old indicators which proved to be ineffective.  Inclusion of too many indicators results in enormous time consumption required to collect and analyze information.  Innovation metrics should not conflict with the system of indicators in other perspectives, like financial or customer.
  • “Project management” approach to innovation.  Often companies view innovation as project which is managed according to common project management methods.  At that, efficiency evaluation is performed based on traditional financial indicators to project management like NVP or IRR.  However, innovation is not a bunch of separate projects but a continuous process of generating, selecting and developing innovative ideas.
  • Innovation indicators are not integrated in the BSC.  It often happens that separate departments develop own innovation indicators and set own innovation goals which, however, may conflict with strategic goals and strategic vision of the company.  In such a case, innovative ideas do not cover the entire company, serving as local projects.
  • Focus on cost saving.  Often, innovative ideas are used only to decrease losses but not too study customer needs and satisfy them using innovative methods.  At the same time, statistics show that satisfaction of customers needs using innovative ideas inevitably results in cost savings as well.
  • Focus on past events.  Failure to implement goals results in fear to make radical steps.  No management system can eliminate this fear.  That’s why the company needs to make sure that both success and failures of innovation teams should be encouraged.  Of course, such approach works only if personnel is truly committed to innovative ideas.  Mistakes are often used as a valuable experience which makes it possible to avoid such mistakes in future.
Major innovation mistakes

Major innovation mistakes

Summary and recommendations

  • When selecting innovation indicators use both financial and non-financial/qualitative metrics.  Changes in nonfinancial indicators will make it possible to timely locate problems in innovation management system and take response actions.
  • Regularly check actuality of indicators been in use.  The company and the market are developing, and thus some indicators may turn out of date.
  • Do not use complex indicators.  Remember that, ideally, Balanced Scorecard System should involve participation of the entire personnel
  • Do not use too many indicators.  A dozen of indicators will be enough.
  • Use at least one indicator which measures customer relationship
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