The way companies measure innovation initiatives is outdated. Despite all the progress that has been made in innovation practice in the last decade, firms are still measuring innovation in much the same way. And let’s not forget that what gets measured gets done (with apologies to Drucker, Lord Kelvin, Rheticus or whoever the original source was).
Companies are using the same old metrics.
Take a look back at surveys on innovation practice that were done in 2008 — here’s one by BCG, and another by McKinsey. The most frequently used metrics include:
- Percentage of sales from new products or services
- Overall revenue growth
- Number of new products or services
- Return on innovation spending.
Fast forward to more recent surveys (e.g., by Innosight & Innovation Leader) and almost exactly the same metrics show up on the leaderboards. For example, the top ranked metric in the IL survey was “revenue generated from innovation projects” — which captures the same insight as the first two metrics from the earlier surveys shown above. Another popular metric in the IL survey was “internal rate of return” — essentially equivalent to “return on innovation spending.” While “number of new products and services” didn’t explicitly show up in the IL survey, firms still take the same simple activity-based approach, just earlier in the pipeline (e.g. number of projects in the pipeline, number of ideas generated).
It’s not that these are necessarily bad metrics. For example, as an impact metric, “percentage of sales from new products or services” meets several key tests:
- It’s likely to align strongly with senior management’s objectives for their investments in innovation.
- It’s clear and easy to communicate.
- It’s (relatively) straightforward to collect the data necessary to calculate the metric.
I guess it’s possible that metrics haven’t changed simply because everyone is happy with the metrics they have—they get all the information they need from them. But that doesn’t resonate with our experience, and everyone sure seems dissatisfied with innovation.
Innovation performance measurement is more than metrics.
Conversations about innovation measurement often start and stop with the topic above—which metrics are best? That’s another way innovation measurement—and I would argue, innovation performance—is stuck. With rare exceptions, companies haven’t gotten more sophisticated with measurement practices in the last 10 years, either. If they had, I’d expect to see more high-quality measurement systems that:
- Are elegant. An up-to-date measurement system would be clear as to purpose and streamlined to collect only metrics that are used to make decisions.
- Enable benchmarking. Cutting-edge innovation measurement would enable comparison of performance, internally (e.g., across business units, over time) and externally.
- Are built for communication. Where outdated systems are built only for reporting status “up,” high-quality systems help project teams make decisions and build understanding and commitment among stakeholders.
- Align with decision-making culture. Effective measurement systems align communication with the way decisions are made in your company.
- Are effective for diverse portfolios. High-quality measurement systems handle hard-to-measure front end and “disruptive” projects, not just routine new product development projects.
- Measure the impact of changes. A cutting-edge system would be able to quantify the impact of changes to processes and tools, and innovation culture initiatives, on outcomes.
Measurement hasn't kept up with the evolution of innovation practices.
What’s particularly striking about the lack of change in metrics is that innovation practices have evolved significantly in recent years. Take, for example, the use of tools and methods like human-centered design, Lean Startup, and agile innovation. In many ways adoption of these practices marks a significant moment in the maturity of innovation management as a function. No longer are innovation professionals forced to adapt ill-suited tools and methods that were developed for parts of the business that focus on execution. Now they have at their disposal techniques specifically developed to address the challenges unique to innovation initiatives. Many of these techniques create the opportunity to measure innovation initiatives in more effective ways — ways that more accurately reflect whether an initiative is successful and likely to deliver value for the organization.
Innovation practices are evolving. It’s time the ways we measure innovation did too.
