Metrics for Innovation

How do you measure the results of an innovation programme? Do you count the number of new ideas you generate? How about the number of things your innovation team has worked on, or the number of new product introductions they’ve made?

These are all useful measures, but don’t necessarily reflect anything that will justify the existence of an innovation team. There is only one thing that will do that: a connection to financial results. And the results need to prove that innovation is a very special investment. One, in fact, that is better than any other available.

This is true whether the innovation team is working in the private sector (with measures relating to cost savings and new revenue) or the public sector (whose measures will be largely cost saving only).

The financial hurdle innovators need is to recoup the funds invested in them, and then make enough new money to demonstrate they are the best available investment opportunity available.

Consider the scenario where an organisation can choose to invest funds in, say, a Lean initiative. Or, alternatively, it can invest them in an innovation programme instead. It’s projected that the Lean initiative will result in at least a 20% return on investment as bloated processes are thinned down and operational efficiencies are found.

So innovators, then, must make at least 20% on their efforts if they want to get funding. Considering the fact that a Lean programme will likely be more certain (i.e., there will have less risk in achieving returns than for innovators, who will have to deal with a failure rate of, maybe, 80% on what they do), innovation really needs to do better than 20%.

This is a fundamental tenant of capital pricing. The more risk in a particular investment, the higher the return needs to be to justify the investment in the first place.