Measuring ROI from Innovation
Only 21 percent of companies have a structured process for measuring the value of tech innovations. In other words, only 21 percent of companies can answer a crucial business question – Is all of our investment necessary?
Unlike most other forms of businesses, measuring innovation presents many uncertainties making it quite difficult for many companies.
Simple in Principle, Hard in Implementation
In principle, measuring innovation’s ROI is simple- work out how much you spend on innovation, compare this to the value-added to the business, and take management actions to improve performance.
In practice, however, many companies struggle. There are several complications around what "Innovation," "Investment," and "Return" means and, as a result, what effective management means in a given context. This becomes even harder with the changes in the corporate landscape brought about by the rapid technological advancements.
Why is measuring innovation essential?
Measuring the ROI of innovation is essential for many different reasons but mainly to ensure you're on the right track. This means having the right Innovation Metrics in place to measure your progress and enable you to make data driven decisions for improvements and investments.
Innovation Metrics refer to inputs and outputs that foster innovative behaviours in a company. Metrics are used to measure innovation’s ROI. Innovation Metrics allow you to gauge whether you're doing enough of the right kinds of activities to achieve your results.
Innovation Metrics include:
- Return on Investment (ROI) Metrics – measure resource investments and portfolio’s financial returns. ROI metrics help management recognise and justify the value of a strategic initiative or a program within the overall innovation portfolio.
- Organisational Metrics - Focus on the infrastructure and process. Organisational Metrics provide a blueprint for programs geared toward developing sustainable approaches to invention.
- Leadership Metrics - Behaviours that managers must exhibit to support a culture of innovation within a company, e.g., supporting specific growth initiatives.
Each of these categories has 'input metrics' and 'output metrics.' Input metrics are the investments, assets, and actions that are required to drive results. Output metrics, on the other hand, represent the outcomes from the innovation initiative.
With that in mind, some could argue that metrics are the most important gears of innovation. They help drive behaviours, encourage good leadership and evaluate the results.
Some examples of the most prevalent metrics are the R&D conversion metrics, number of patents filed, number of active projects within the company, and the percentage of sales driven by products developed in the past year(s). But ultimately, the metrics that you require and value are up to your organisation to discuss and decide.
How to pick the right innovation metrics to ensure success
Success in measuring ROI using innovation metrics depends on many factors. Some of which include:
- How precisely you articulate objectives in managing ROI, including ambitions realization and value optimization.
- The clarity of governance and accountability model. You need to put in place proper governance and control functions for managing ROI to ensure the efficiency of an approach.
- Having a consistent method and using consistent logic that matches innovation valuation methodologies with levels of uncertainties across the portfolio.
- You must always consider the value impact of innovations on existing business processes. This metric should include taking account of cannibalization risks against the ‘cost of doing nothing.’
Stepping into the digital era, metrics are a must.
Innovation, like every activity a business ventures into, and involves investment of capital and time, has to be measured. Currently innovation is seen as a relatively risky investment. But this stems from the difficulty of measuring it. While metrics work, none abound universally.
Plus, the challenge of measuring the ROI of innovation is becoming more difficult as the world becomes more dynamic and we shift towards the digital era. With more moving parts and more parameters to consider.
There is no doubt that all companies need the correct metrics around their innovation efforts to ensure success and avoid experiencing huge misses.
To achieve a balanced state between innovations and uncertainty, companies must establish concrete yet advanced methodologies that establish a blueprint against which tech innovation should be pursued, measured, and ultimately introduced to the market.
If you need help to develop your Innovation metrics and accounting please reach out to me for help through email or LinkedIn.