Innovation is crucial for the long-term survival and prosperity of any business; if you ignore this aspect of your company's development, then the best-case scenario for your organisation is stagnation. It is a very modern problem, too: more than 70% of executives consider innovation a top-three priority for their firm's future, according to McKinsey.
However, that same survey also highlights the other side of the innovation coin: namely, that it is incredibly difficult to quantify and measure innovation. Indeed, less than 25% of those executives have any metrics in place to measure innovation in their organisations.
How, then, can you buck the trend?
Measuring Innovation in Business
Whenever your firm introduces a new product or service, it is innovation in action. Alternatively, it can be the introduction of new processes that improve various aspects of your business, such as productivity or efficiency. Essentially, any change that imparts added value to your company can be attributed to the overhead of innovation.
In a practical sense, innovation is commonly associated with an organisation's research and development (R&D) department. In certain progressive industries, such as electronics, pharma, biotech, or digital services, this means patents or intellectual properties, but this isn't always the case.
Finally, innovation can either be incremental, through the gradual improvement of existing products or processes over months and years, or outright disruptive, leading to the creation of entirely new segments or markets.
Why Do You Need to Measure Innovation?
Success in business relies on tangible, quantifiable data. Firms often invest a significant amount of time and resources into their R&D departments (or alternative processes that generate innovative new ideas). Without reliable metrics, how can you decide if these investments are delivering results? After all, if you don't attempt to measure innovation, your R&D spending becomes akin to throwing money at a lottery in the hope of landing a winning ticket.
It's not just about seeking returns, though. For starters, measuring innovation is a sign of fiscal responsibility. It helps to reinforce a system of accountability within your business, and is essential to ensuring that your organisation is moving in the right direction.
The Difficulty of Measuring Innovation
As discussed, innovation is a very complicated process that often defies quantification. Though it is often linked to R&D and technologies, innovation is, in fact, a more nebulous concept. Take the example of the iPhone, one of the most innovative products in recent history.
Apple and Steve Jobs are, of course, widely credited with the product. Yet many of its components were developed by third parties, including the US government. What Jobs and Apple did more effectively than anybody else was to bring these different parts and existing technologies together into an effective, unique, and highly marketable package.
Indeed, other phone manufacturers such as LG and Samsung all had access to similar technologies. What they lacked, though, was the innovative vision of Jobs and the Apple design team. Therefore, being innovative is not just about developing new tech or ideas, but also about executing them.
Unsurprisingly, there is no single metric that can adequately measure such a long and complicated process as the one above. Even in simpler, more straightforward cases, finding the right blend of different parameters is not easy.
Input and Output Metrics
One solution, however, is to explore input and output metrics – the simplest and most traditional form of innovation measurement.
Input metrics focus on the "investment" side of your innovation ROI equation. For instance, what percentage of your budget was spent on R&D? How many hours did your staff spend on innovation exercises or brainstorming sessions? These are common questions you would ask to measure input metrics.
Conversely, output metrics focus on the "returns" end of the innovation ROI equation. It measures the tangible impact – if any – that your investments in R&D have wrought on your organisation. How many new products have you launched in the past X years? Have you generated any extra revenues or savings through these new processes or systems? The answers to these questions will give you your output metrics.
The key is to use them in tandem. Looking at any one of the above metrics in isolation – as many firms have been guilty of in the past – will provide an incomplete picture; only by combining the two in some form will you get a more accurate understanding.
Common Metrics and KPIs for Innovation Measurement
In the modern business environment, managers and business leaders have access to a plethora of key performance indicators (KPIs) that offer deep insight into your innovation efforts. They include the following:
Financial Metrics
In most cases, the money trail will form the backbone of any firm's attempts to track and measure their innovation. The importance of measuring this input cannot be overstated; it is of massive significance to your investors, and ensures accountability and fiscal responsibility.
There are several useful financial KPIs in this regard. You could calculate the percentage of company capital invested in R&D and other innovation activities, or measure the impact of innovation on your company's balance sheet (such as tracking the effects of R&D spending on revenues through new product sales).
Note, though, that there is a case to be made against the overuse of financial metrics when tracking innovation. Innovation, by its very nature, is a risky proposition. Too much reliance on the financial elements involved may discourage firms from spending more on essential research.
Product Metrics
This is a relatively simple metric; when you launch a new product or service, you track its sales and revenue trajectory. You can then compare this data with other innovative products to get a better idea of the value creation aspect of innovation in your firm.
It is also essential to keep track of the ideas that went into the creation of your product. Companies often measure the source of innovation, whether it is internal (such as through employees and R&D departments), or external (such as from consumer feedback or client organisations).
Staff Metrics
Many of the Silicon Valley tech giants place a considerable emphasis on encouraging employee innovation. They often use measurable timesheet metrics to put aside certain hours for employees and teams to focus on brainstorming and coming up with new ideas.
Other metrics worth tracking include the time and money spent on employee development, the rate of use of new technologies or software by the staff, and the level of team morale when working on innovation-related activities.
Leadership Metrics
Last but not least, the role of leadership KPIs cannot be ignored. In any business, the initiative to foster innovation has to come from the top. Some of the KPIs used on staff can also be applied to the upper echelons of a firm.
These metrics assess how involved top-level managers and executives are in your innovation programmes. For example, how many hours do they spend on such programmes? Is anyone taking a hands-on approach for innovative projects within the organisation?
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Innovation in business is not just restricted to specific divisions such as R&D, nor is it measured and defined solely by the amount of cash you funnel into such initiatives. Instead, effective measurement of innovation requires the use of many different metrics and KPIs that focus on various aspects of your organisation. Without a comprehensive approach, you will only get a partial picture at best, or worse still – a wholly inaccurate one.
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