Measuring Innovation: Quantifying Qualitative KPIs
Author: Florian Altmann (Part of the Innovation & Ventures Team Deloitte);
Introduction
We work in the field of business innovation, helping clients to grow their business with products, services, and business models that they do not offer yet. “Innovation” in this article is defined as something a company provides which is either new to the world or to the specific industry. It can be an improvement on current offerings or the use of new technologies to meet the needs of existing or new customers.
In the past, until the late 2010s, the word “innovation” itself generated interest and positive connotations, with an air of inspiration, fun, and opportunity. However, companies, universities and individuals have begun to look more closely at the real impact of innovation.
We live in a period of dynamic change that demands business innovation on many levels more than ever before. But how do we know if we are moving in the right direction and at the right speed for success? How can we track progress?
As commercial operations are managed by looking at quantitative KPIs, numbers and factual representations of the business, innovation work has come under pressure to provide the same level of measurability not only at the end, when the investment is returned, but all along the process, starting from the first business hypothesis.
While it is common practice to review factual numbers and manage businesses and corporations on that basis, the benefits of dashboards and the rise of tableau to simplify their construction have increased transparency and reduced the expertise required to read the numbers. As a result, the view of innovation is further obscured when there are simply no meaningful numbers to present.
In the following article, I will outline the current state of innovation measurement. I will give an overview of why measuring innovation progress is so important and what approaches we have developed in our daily work with the clients we advise.
Importance of measuring innovation
Digitalization and connectivity have provided us with numerous opportunities for new scalable businesses and new customer experiences. The speed and power that hyper-scalers such as Alphabet, Amazon and Meta have grown in size, profit, breadth of offering, and market value has shown that the only way to grow and survive as a business is to innovate, to go beyond what is currently generating your company’s profits. Multiple crises over the past three years have highlighted the opportunity and need for innovative approaches, new offerings, and faster time to market.
While many companies see their R&D efforts as sufficient, the rise of the hyper-scalers and companies such as Apple that combine old-school engineering and product development with scalable digital models tells us otherwise. If a company fails to innovate in its business models, the way it does business and the way it approaches customers, it will underperform and even risk becoming obsolete. Doblin’s 10 Types of Innovation* provide a good idea of the range of possible innovations for any given company or business.
As this has been widely recognized, many companies have made innovation a top priority to develop and grow their business, attract talent and increase their visibility to investors. Design Thinking* and other approaches have been widely touted as democratizing innovation. However, when it comes to innovation impact and measurable results, many innovation efforts have failed. A big reason for this is that an approach is only as good as the people who use it, and first-time innovators are unlikely to transform an industry on their first try.
The second, and equally important, reason is that innovation has been seen as immeasurable, as something to be believed in the face of skepticism. Business mythology tells of cases where an entrepreneur ignored what everyone else said and succeeded.
And this is where it gets interesting: Innovation is by definition a journey into the unknown. But by reviewing past cases, clear indicators emerge that make it possible to assess and predict the likelihood of future success. These innovation indicators need to be carefully chosen to be compatible with companies’ controlling, governance, and management in general, so that the innovation KPIs ultimately allow monetary value to be measured.
How to measure innovation
Over the years, while working on many client projects, we have developed a number of KPIs that help to measure innovation effort and impact. These are highly organization specific, so the KPIs shown are only examples, not a complete list.
- Innovation Agenda
The first indicator to measure is the Innovation Agenda. It describes what an organization wants to achieve with its innovation efforts. There are two aspects to the innovation agenda, which we call “strategic plays” and “external perceptions”.
a) Strategic Plays
We need to track how well the innovation initiative in question aligns with the organization’s business or corporate strategy.
KPIs may be:
● How many innovation topics, trends, and threats does the company track to inform its innovation agenda?
● Is the innovation agenda clearly articulated and consistent?
● How well are the innovation topics aligned with business strategy?
● How many innovation topics are addressed by business innovation?
● How many innovation initiatives use exponential technologies?
● Is the funding of innovation initiatives aligned with their strategic importance?
b) External Perception
How is the organization perceived externally by partners, customers, and consumers?
KPIs may be:
● How many external partners are involved?
● How broad is the engagement with external partners?
● How does the organization perform in 3rd party innovation rankings?
When we surveyed 100 of our clients in regard to their innovation agenda, a strong majority claimed to know exactly what they are doing and why. However, we also discovered that only a small minority where actually investing according to the strategic weight of their innovation initiatives.
2. Second indicator of future success is Innovation Portfolio Management
Innovation ideas need to evolve iteratively, and sometimes they reach a dead end or need to pivot to address newly identified customer needs. This means that more initiatives need to be launched to compensate for those that are abandoned. In portfolio management, we look at the expected financial return and the portfolio of innovations.
a) Financial Return
Assess the extent to which the organization is focused on the returns from that innovation effort. This means that every innovation effort needs to be seen as a business in its own right, with a business plan covering the balance sheet, the resources required, and the timing. Unlike a running business, this plan requires some agility and constant reflection on how the emerging and developing innovation is tracking goals, objectives, and planned financials.
KPIs are elements that are typically found in business plans such as:
● Monthly burn rate in development and production (where applicable)
● Diverse expert opinion on the expected addressable market size for the innovation, to be confirmed in prototype market tests
● Continuously updated and diverse expert opinions on the business case, expected direct and indirect revenues from the innovation, as well as cost of product development, product production, and market launch, to be confirmed in prototype market tests
b) Innovation Portfolio
Does the organization have a healthy, balanced, and growing innovation portfolio?
KPIs may be:
● Number of innovation initiatives
● Number of and Euro-value of innovations by phase, assessed first by experts, then in pitches with co-investors
● Number of discontinued projects per phase
Working with a very large enterprise software company, we realized that they were pressuring their middle management and the development teams to complete every project, regardless of its promise, after repeated reviews over time. Since only the best innovation will survive in the marketplace, doubtful new software packages should be taken off the developers’ desks — or the doubts should be eliminated.
3. Measuring how the Innovation Process is run and managed is a prerequisite for the future success of initiatives
KPIs may be:
● Status of initiative per step (on track, yellow, red)
● Time in funnel phase
● Budget spent
● # of innovations brought to market
● Revenue generated
● Team health
Frugal innovation only makes sense if the opportunity is as small as the development budget. We have seen repeatedly with our clients that the potential business impact has not been taken into account when sizing the possible and necessary effort and investment. It is necessary to plan a life cycle for the innovation initiative and the duration of the development. It is necessary to track actual progress against expectations and to continually challenge the assumed business case for that initiative.
Innovation Enablement plays a major role in sustainable innovation efforts. Measuring innovation enablement shows how well innovation is supported and driven internally. We look specifically at the culture and capabilities within an organization.
a) Culture
Significant for long-term success of innovation is the internal perception of innovation efforts and the level of employee engagement.
KPIs may be:
● budget, resources to support and foster innovation
● employee sentiment towards innovation initiatives
● support of innovation by supervisors, mentions of the topic in public
b) Capabilities
We need to assess how well positioned the organization is to succeed in its innovation efforts, based on its internal capabilities.
KPIs may be:
● existing experts/talent and hiring relevant profiles
● proliferation of digital fluency & tech skills
● # of people trained on innovation capabilities
Measuring culture and capability takes us to the heart of an organization. However, a large German retailer makes decisions about its ventures based solely on the quality of the teams that drive those ventures. In their experience, the right people can make anything happen, while a disharmonious team will struggle to succeed at anything.
Conclusion
We have shown that it is possible to get a very detailed picture of the innovation activities. It is in the nature of approaching the unknown that the real impact cannot be measured at the beginning of innovation activities. However, as we argue here, many values can be derived early in the innovation process that make measuring, tracking, and managing possible.
While the uncertainties at the beginning of an innovation initiative may lead to an emphasis on qualitative assessments, I have shown here how to quantify these to make them manageable in a commercial organization. As the innovation process progresses, more and more financial and market numbers harden the reporting to the point where the innovation has become an ongoing new business.
Part of innovation work is recognizing the uncertainties in the KPIs and then systematically researching and experimenting to remove these uncertainties. For example, if we don’t know how many customers will be attracted and how much they will be willing to pay for a new service or product, we need to build prototypes and test customer behavior before we invest heavily in rolling out the new services and products at scale.
Inexperienced innovators will make many mistakes that lead to a lower probability of success. And if they are not familiar with tracking and measuring the likelihood of success of these initiatives, it will lead to a downward spiral of poorly managed innovation initiatives, unrealistic expectations, no tracking of relevant KPIs, and low actual return on investment.
The way out is to use a broad set of innovation KPIs and to have the expertise to select the relevant ones that match the innovation ambition.
