How to Financially Measure Innovation Performance
Do you know how your initiatives are contributing to the cause?
Originally published on Pivotal Innovation’s Blog, written by Kevin Fallon.
I get asked all the time about how to measure if your innovation efforts are successful since the concept of “innovating” can be somewhat vague and mean different things to different people. How you measure the success of your performance depends on the scope of your effort, but here are some measures that I regularly use:
- Revenue from New Products — Great companies look at what the revenue is from new products. Some companies define new products as products released into the market in the past 3 years but most look at products released in the market in the last 5 years. Most companies’ performance is in the 8% range but great companies perform at greater than 20%. For example, 3M sets a goal of 35% and DuPont sets 30%.
- Strength of Your Pipeline — Just like a sales funnel, look at the strength of your innovation pipeline. This doesn’t only apply to new products. It includes new business models, processes, organizations, partners, channel relationships or strategy itself. Analyze the transformations going on in your company but make absolutely sure they are moving the needle on value to some customer set, whether it be new value to current customers or value to new customers. How robust is that pipeline?
- Return on Innovation Investment or ROII — According to Harvard Business Review, “Return on Innovation Investment (ROII) is a reasonable, aggregate measuring stick for innovation — you can calculate ROII by taking the profits or cash flows produced by innovation and dividing that figure by the cumulative investment required to create those returns.”
- Time to Market — A company may say, “We are good at strategy but not good at execution.” But how do you know? The two go hand in hand. If you speed up time to market then measure how fast you are releasing into the market. This also applies to services or processes. If the time to recruit new employees is critical to your business as it is in service companies, you may want to create a new recruiting process in your HR department. Whatever time it’s been taking, set a target of half that time. It will force your HR people to think in unconventional ways but it’s not as difficult as you think to achieve. Time to value is the key ingredient for this measurement.
- Apply Little’s Law to Innovation — The average number of innovations produced by your company L is equal to the effective new initiative rate, λ, multiplied by the average time an innovation is worked on in the system, W; or expressed algebraically: L = λW. The key is to prioritize the initiatives and only work on those that are attached to driving value to customers, new or current. Remember, contrary to belief, your constraint is not ideas, it is the time and energy of your people. Prioritization and limitation increases speed of innovations through your company.
A great way to keep track of the financial impact of your innovations is through an innovation management system. Each step of the innovation process gets tracked and archived so that you can easily run analyses of your time to market, ROII and revenue from new products. Taking a systematic approach to managing your innovation process will increase profitability and make financial impacts easy to measure.
Want to execute better on your strategy? Curious how to set up a repeatable process for innovation? Contact firstname.lastname@example.org or visit us at www.pivotalinnovation.com