Find out why innovation is so hard to measure, the issues with current innovation metrics, and how to measure what really matters.
How do you measure your innovation efforts? It’s not a trick question. Of course, having reliable innovation metrics in place is a no-brainer: if you’re expending time, money and resources on making innovation happen, you’ll want to be able to prove its value.
But which metrics do you use, are you sure that they’re reliable, and is there a better way? Read on to find out why innovation is so hard to measure, the issues with current innovation metrics, and how to measure what really matters.
Why is innovation so hard to measure?
By its nature, innovation is often intangible and abstract by nature, which can make it difficult to decide which metrics will work the best. However, it’s not the only issue with innovation measurement.
For many businesses, one of the fundamental issues with trying to measure innovation is the fact that innovation itself can be defined in a variety of different ways. Its meaning can depend on the organization itself, the person or team leading the project, the part of the business it affects and the type of innovation itself. With so many variables involved in determining what innovation actually is, it’s understandable that many organizations find it tricky to measure.
For that reason, it’s vital to define each innovation project in advance, in order to be able to create a definitive and practical set of metrics by which to measure its success. It could be that you’re looking to create a new product or service to bring to market. It could be that you are looking to improve existing processes, or to find ways to improve the morale of your staff or increase their productivity. It could be around improving customer satisfaction, tweaking existing products, creating a completely new market.
Once you’ve defined your innovation, it’s time to choose the metrics you use to measure its success. But are you choosing the right ones?
The problem with current innovation metrics
As innovation has such a reputation for being tricky to measure, many organizations fall into the trap of simply measuring what’s easiest to measure, rather than focusing on the right metrics.
These “easy” wins may include the percentage of sales that come from newly developed products, or the number of active projects within a set period of time. However, can these metrics really give an accurate picture of what’s really happening, help with resource allocation, assess how effective your innovation work is, or hold members of the team accountable for its success?
Can such metrics accurately measure disruptive innovation – particularly when you create an entirely new market with no competitors to benchmark against?
Not only are some of the current metrics too simplistic, but they can also be counterproductive. If, for example, one of your metrics is the number of new products or services you bring to market, you risk having your team focus on the wrong outcome. Is it wise to encourage your organization to rush five new products to market in a set period of time to meet KPIs, or would you be happier with two new products that you can guarantee will be a success?
Finally, be careful of metrics overload. In an attempt to make innovation easier to measure, it can be tempting to create a dashboard comprising as many metrics as possible, in order that nothing is missed. However, do this and you run the risk of putting too much focus on the metrics themselves, taking away resource from the actual innovation process.
Measuring what matters
As Rob Sheffield, Director of Bluegreen Learning, says, “Your metrics should align with your strategy, not the other way around”. Any innovation project that you undertake should have a link to your overarching organizational strategy: if, for example, the strategy is to become your market leader within five years, innovation projects could include things like becoming no.1 for customer service, tweaking existing products or services to offer a better product or better value than competitors, or developing brand new products that competitors do not offer.
The innovation metrics that you choose for these products should accurately reflect your progress towards this “market leader” target.
If, for example, your focus is on creating a brand new product that outperforms competitors, the truth is that the project could take years to realize a tangible benefit. Here, incremental value delivery could be the solution: creating a minimum viable product (MVP), releasing it to customers for testing and feedback. It will mean that you get quantifiable results at regular stages of the product journey, not only allowing you to measure the success of your innovation, but making it easier to revise and refine the product before its final launch for the greatest chance of success.
Examples of innovation metrics
You may be wondering why, as yet, we have given very few examples of exactly what you should be measuring for your innovation projects to succeed. The answer is simple: there is no one-size-fits-all approach.
As we explained earlier, every organization, every team within an organization and every project within a team will most likely have its own definition of innovation, and will therefore require different metrics.
As ISO 56002:2019 – the international standard for innovation management – states, “The innovation performance of an organization is dependent on processes that are operating towards a common purpose. Measuring the interaction between elements develops the understanding of their interrelation. Managing these elements as a system improves organizational learning, effectiveness, and efficiency."
With this in mind, we bring you two ways of establishing which metrics are right for you: deciding on your input and output metrics, and an introduction to the innovation accounting system.
Input metrics vs. output metrics
Generally, you’ll find that innovation metrics are divided into two different categories: input metrics, and output metrics.
Input metrics measure what is going in. These help you to decide whether the time, resources, funding and more that you put into your innovation project will actually allow you to meet your goals, or whether they need adapting.
Output metrics, on the other hand, measure the impact of these resources on your innovation activity – what comes out of innovation, rather than what goes in. Essentially, they will allow you to establish whether your innovations are actually turning into something that is of use.
It can be tempting to focus purely or predominantly on output metrics – and many organizations do – as there can be greater satisfaction in the results that you see. However, focus only on the output, and you’ll find yourself with metrics that are less actionable, as they can only be measured once it is too late to make changes to the inputs.
Instead, for the most effective measurement of innovation, choose both input and output metrics. The individual metrics that you choose will depend on your own requirements, but here are some examples in three different categories:
Example input metrics: Percentage of senior management time spent on innovation vs. day-to-day business; percentage of senior leaders with innovation training.
Example output metrics: The number of senior leaders that become leaders in new category businesses formed through innovation.
Example input metrics: The existence of formal innovation processes; the percentage of employees who have received innovation training.
Example output metrics: The number of new opportunities gained through innovation; the number of innovations that have made a considerable impact on the business.
Return on investment
Example input metrics: The number of new products, services or processes launched in the last year; the percentage of capital that has been invested in innovation.
Example output metrics: Targeted vs. actual break-even time; percentage of revenue or profits that comes from new innovations.
Another option, first discussed in The Corporate Startup, is to go down the innovation accounting route. Lean Startup founder, Eric Ries, describes innovation accounting as “a way of evaluating progress when all the metrics typically used in an established company (revenue, customers, ROI, market share) are effectively zero”.
There are three different levels of innovation accounting, each of which requires its own metrics:
Level 1: Creating dashboards featuring metrics that are both measurable and actionable, and which help you to identify and test out particular assumptions. These may include the number of customers who give feedback or try your product, or the amount they say they would be willing to pay.
Level 2: Identifying “Leap of Faith Assumptions” and creating dashboards to test, measure and validate these. This stage is made up of inputs that feed into a successful business plan, and may include things like repeat purchase rates, retention rates, word of mouth referrals and more.
Level 3: Net Present Value dashboards, which combine a range of metrics that will help to define and drive your longer term business model. Often, many of these will be financial, including metrics like amount paid per customer, the percentage of your users that pay money for your product/service, and revenue per transaction.
Most organizations will agree that innovation efforts should be measured. However, the issue comes with deciding how to measure them, and working out whether the metrics you choose will truly give you what you need.
When done right, innovation can be incredibly rewarding. When not measured properly, you may find that you waste time, money and resources – and that getting buy-in for innovation projects in the future can be more of a challenge. The important thing is to decide which metrics work for your particular organization, your team and the project in question, and which will tell you whether your project truly was a success.