Innovations Innovation metrics

Some progress but could do much better

ven in the current economic turmoil, innovation remains a high strategic priority for most companies, and it is typically seen as a strong contributor to growth. Yet many of these same companies still struggle to measure, as effectively as they should, the performance of their innovation activities. A fact conrmed by three different studies on innovation practices and measures conducted during the later half of 2008.

This is critical, because the old adage of you can not effectively manage what you can not measure, also appears to be backed up by ndings within the study conducted by the Boston Consulting Group. This reports that only 43 percent of respondents appear to be said satised with the payback on their innovation investment a percentage that has been falling in recent years. In terms of industrys overall attitude to innovation measurements, it is the Boston Consulting Groups (BCG) senior management survey entitled Measuring Innovation 2008; squandered opportunities that appears the most damning of the three. It notes that only 43 percent of companies surveyed track innovation as rigorously as they track other (and less important) business operations, even though three out of four executives believes they should do so. Also, only 35 percent of executives are satised with their companys current innovation-measurement practices. The study report adds that in general, Companies under measure, measure the wrong things, or, in some cases, dont measure at all, because they are under the mistaken impression that innovation is somehow different from other business processes and cant or shouldnt be measured. The potential cost of this error in terms of poorly allocated resources, squandered opportunities, and bad decision making generally is substantial. The McKinsey Global Survey; Assessing Innovation Metrics, reports that 16 percent of the respondents say that their companies do not use any metrics to assess innovations. Also, while its ndings from those companies that do measure innovation appear to be more positive, with most apparently satised overall with their use of metrics to assess innovation portfolios, the survey report suggests that many should not be. It claims that many are not effectively using these metrics as well as they could, and most notably, it states that companies are much likelier to rely on metrics for outputs than for inputs, so they are not assessing the whole process of innovation. The same survey also highlights the important link between measurement and performance. It notes that the companies reporting the highest contribution to growth from their innovation projects tend to use metrics better, especially in terms of being more interested in pursuing and measuring their innovations as a portfolio and therefore using metrics across the whole

DOI 10.1108/02580540910943550

VOL. 25 NO. 4 2009, pp. 35-38, Q Emerald Group Publishing Limited, ISSN 0258-0543

STRATEGIC DIRECTION

PAGE 35

innovation process. In the end, they are more satised than others with the ability of such metrics to help their organizations do everything from aligning individual performance incentives to improving innovation performance to communicating with investors. Perhaps the most positive ndings in terms of approach come from The 2008 Biennial Product Development Metrics Survey conducted by Goldense Group Inc. (GGI). But, this was only positive in as much as its ndings seem to show that: nally, after 10 years of surveying industry practices on metrics, there is positive change and movement in measurement practices with more companies now beginning to focus on innovation measures to boost their overall innovativeness.

So what is being measured?

As regards actual measurements and practices being applied by companies, the BCG survey found that more than half of companies (58 percent) use ve or fewer metrics to keep track of the progress and success of their innovation activities; a number the report suggests is far too few to measure and gauge the full range of their innovation efforts. It also found that 12 percent of companies did not know how many metrics are used for innovation. According to the McKinsey Global Survey, companies use about eight metrics, on average, to assess innovations. The report also notes that although the goals of companies would suggest the need to emphasize the overall innovation process, that process is rarely the focus of the metrics companies use most. More specically, when asked which metric is the single most important among those used, executives are much likelier to cite a few simple outcome metrics than input metrics or performance metrics. This is particularly true of companies that do track the relationship between shareholder value and spending on innovation. For these companies the survey found that the three most important metrics are all externally focused: revenue growth, customer satisfaction, and the percentage of sales from new products or services. Although, at companies where innovation is the most important strategic priority, the top three metrics are a somewhat more comprehensive mix: customer satisfaction, the number of ideas in the pipeline, and R&D spending as a percentage of sales. As part of its comprehensive study, the GGI survey investigated the penetration and the degree of usage of 88 measures of overall/corporate-level R&D performance. It found that there are still only 7 metrics that have penetrated more than 40 percent of industry. These include (in order); R&D spending as a percentage of sales, total patents led/pending/awarded, total R&D headcount, current-year percentage sales due to new products released in the past N years, number of new products released, number of new products/projects in active development, and resources/investment dedicated to new product development. The GGI survey report notes that over a ten-year period of undertaking this research certain things have not changed, such as the overall levels of industry penetration. There are still only a handful of metrics that have penetrated more than 40 percent of industry, and they have remained essentially the same for a decade in spite of all the emphasis on measurement. Also, closer examination of the top seven metrics reveals that only the fourth and fth metrics are high velocity for most companies. The fourth metric, also known as 3Ms Vitality Index Metric, measures the revenues from investments in R&D. The fth metric, measures the number of product releases that produce that revenue stream. These are the two good bottom-line performance measures among the group. However, the GGI survey also found a number of other interesting and important ndings:
B

It notes that the total number of metrics in use has increased, and also experimentation is on the rise. Many companies are trying out old and new metrics that they have not used previously. Likely the quest is to nd even better measures of performance than have been present in the past.

PAGE 36 STRATEGIC DIRECTION VOL. 25 NO. 4 2009

Return on innovation (not to be confused with ROI), a relatively new corporate-level metric that gets at the productivity (output/input) of R&D, has achieved a 25 percent penetration. It is calculated seemingly six different ways, but it is being calculated. Technology licensing revenues is now calculated by 15 percent of companies, and Technology Licensing Prots is now calculated by 11 percent of companies. After ten years, there is now a signicantly increased emphasis on metrics that measure prot from R&D. The number of different revenue metrics used by industry and the number of companies using them has dwarfed statistics for prot metrics historically.

How to improve innovation measurement

Having highlighted the state of innovation measurement, and emphasizing the importance of making improvements, both the reports on the BCG and McKinsey surveys provide some guidance as to what companies should do. In particular, the McKinsey Global Survey report stresses the need to measure innovations as a portfolio. It notes that the higher performing organizations in terms of growth through innovation use, on average, only one more metric than all respondents do. But, they are likelier to use metrics across the whole innovation process, such as assessing the number of people actively devoted to innovation, the number of new ideas sourced from outside the organization, and the percentage of innovations that meet their development schedules. The high-performing ones also track the nancial returns from innovation in general and customer satisfaction with specic innovations. Essentially, these companies make greater use of metrics that, taken together, assess the whole process of innovation. Therefore, it concludes that the many companies that do not track their innovations can probably gain a better understanding of their innovation performance just by introducing some of these metrics. The BCG survey report also notes that it is no coincidence that some of the most innovative companies also have some of the most rigorous measurement systems in place but accepts that innovation is notoriously difcult to pin down and so achieving such a system is not easy. It therefore outlines some key issues both operational and cultural that companies wishing to improve their measurement performance should consider tackling. In particular, the report stresses that rst, senior management have to get serious and recognize that innovation can and should be measured. BCG then recommend initially focusing on two key aspects: 1. Install a broad suite of measures. A suite of 10-12 metrics, rather than 5 or fewer, should be introduced. The trick is to identify the parts of the innovation chain that are most relevant the businesss objectives and strategies and pick measures accordingly. To help achieve this as regards tracking individual projects, BCG suggests breaking up the innovation to cash cycle into; startup costs (or pre-launch investment), speed or time to market, scale or time to volume, and support costs (including the amount of money needed to ne-tune or support the innovation once it reaches the market). The right measurement program should cover all four factors to the degree dictated by the companys particular strategy. Sample metrics for the four areas include; number of full time staff involved, actual time to market, decision making time, actual versus planned rst year sales, cannibalization of existing products in the portfolio, product maintenance and service costs. Also, as a starting point, companies should track the four innovation portfolio metrics that are commonly used by others; revenue realized from offerings launched in the past three years, projected versus actual performance, total funds invested in growth projects, and the allocation of investments across different project types. 2. Hold Managers Accountable. The BCG survey found that only 22 percent of respondents said they consistently tie innovation to management incentive, 38% said they never do.

VOL. 25 NO. 4 2009 STRATEGIC DIRECTION PAGE 37

Yet innovation should be a priority for the management team. Therefore one way to ensure this is to tie a substantial part of their remuneration to innovation performance. This tie in will also help balance the typical management bias towards short-term, prot-driven outlooks. In conclusion the BCG survey report notes that as always the key is to start. Companies must pick what seems to be the right set of metrics, put them in place, and track them over time and do what is necessary to make those metrics important to the right people internally. A copy of The Boston Consulting Groups Senior Management Survey entitled Measuring Innovation 2008; squandered opportunities is available from BCG (www.bcg.com). Keywords: Innovation, Measurement, Surveys, Portfolio investment More details on McKinsey Global Survey results; Assessing Innovation Metrics have been published in the McKinsey Quarterly (www.mckinseyquarterly.com). The 2008 Biennial Product Development Metrics Survey is published by Goldense Group Inc. (www.goldensegroupinc.com).

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints

PAGE 38 STRATEGIC DIRECTION VOL. 25 NO. 4 2009