Leaders face enormous pressure to make bigger bets on innovation and execute against them, while facing an overarching tension: How can they fund something without knowing the return on investment (ROI) in advance? By nature, the results of innovation programs are unpredictable.
Many companies invest in innovation, but do not know how to objectively measure if these programs are adding value to the organizations. These organizations are not able to tell if their innovation programs are focused on right areas, if they are being managed correctly, or if they have the right systems and culture. In these cases, innovation becomes similar to shooting arrows in the dark with a hope of hitting the right goals.
To address these problems holistically, I am proposing a model based on a balanced score card. Obviously no model can predict or assure the end result of innovation, but this model can help organizations identify three areas: If an innovation program is focusing on the right challenges and opportunities; if an innovation program is being executed correctly; and if an organization has the necessary systems and culture in place in order to take advantage of the learnings and success coming out of these programs, and continue scaling them.
Many companies invest in innovation, but do not know how to objectively measure if these programs are adding value to the organizations.
This model is based on measuring the leading indicators of innovation initiatives, rather than relying on lagging indicators such as financial measures and traditional ROI models. It connects the dots for innovation initiatives, from ground level to financial and non-financial returns at the top, in an easy-to-follow way. This model also uses the business language familiar to senior management, and thus can become an effective communication tool between innovation program teams and larger organization.
A Model for Measuring Corporate Innovation Programs
Leading indicators inform us about the health of current initiatives and help us predict the future. They are difficult to measure but easy to influence. If they are off the mark, we have time to influence the initiatives, take corrective measures, and bring them back on track. Lagging indicators, on the other hand, are easy to measure but difficult to influence as they tell us about what has already happened. So, we need to find correct leading indicators for innovation that can be measured and controlled to achieve our goals.
The premise of the model is simple: Treat innovation programs as a system with clear inputs, processes, and outputs. Instead of focusing on the end result of innovation (i.e. lagging indicators like revenue), focus on measuring the quality and health of inputs, the health of process, and the environment under which the process is executed (leading indicators). If we start innovation programs with a good innovation portfolio, select the right innovators, and provide them with necessary tools, methodologies of how to innovate, and a dose of a positive corporate innovation culture, then the output of innovation should help address and end customer challenge, and ultimately generate returns for the organization.
At a high-level this model consists of four interconnected hierarchical layers.
Layer One: The Innovation Initiative
This is the bottom most layer in the model where all innovation initiatives are performed.
The first step in setting this foundation is building the innovation portfolio. Initiatives in this portfolio should be co-created and owned by the leadership team and actively maintained in alignment with the strategic priorities and with potential for high-business impact. To stay on track, teams should scan the industry and competitor landscape, build internal networks to collect business challenges and strategic priorities, and collect ideas from employees.
If the majority of innovations are incremental and tackle smaller problems disconnected from strategy, then how can we expect miracles to happen in the future?
If the majority of innovations are incremental and tackle smaller problems disconnected from strategy, then how can we expect miracles to happen in the future? At any point in time, organizations must be pursuing, by design, a variety of innovation opportunities at different levels of impact. These challenges can be at different horizons focusing on core, near future, and transformational areas.
Another aspect of the innovation initiative layer is building a good pipeline of entrepreneurs and intrapreneurs. That includes building a startup pipeline include. The initiatives needed to build an intrapreneurship program are employee training, innovation days, hackathons, mentoring and coaching workshops, and real-world challenges to work on.
Finally, it is at this stage that a company should put in the time and resources required to build an innovation program. This program should be able to execute the pilots/experiments based on the innovation portfolio and publish insights.
Metrics collected in the innovation initiatives layer indicate three things:
- An innovation department’s ability to attract bolder and bigger challenges to experiment with.
- An innovation department’s ability to attract good entrepreneurs and intrapreneurs to work on the challenges.
- An innovation department’s ability to conduct pilots to test capability, validate hypotheses, and collect insights.
Since these are leading indicators, there is still time to improve and course correct, if they indicate that the program health is not as per our expectations.
Layer Two: Internal Impacts
The is the second layer of the model and represents the internal organization — made up of employees, business leaders, product owners, technologists, and process owners. This is also where all internal operations are performed and the cost of the operations are incurred. If innovative solutions and processes are adopted at scale, we should see this layer contributing to lowering cost of operations year-over-year and increasing profitability.
The innovation culture of the organization plays a fundamental role in its ability to act on signals or insights critical to the future of the business. Measuring and putting a rating to innovation culture in terms of the learning culture, growth mindset, and ability to make quality decisions is difficult and subjective. To further complicate things, this is the layer where organizational politics, turf wars, organizational alignment, and build-versus-buy conundrums come to play.
The right culture, routines, and systems need to be in place for discussing and debating insights from innovation initiatives and acting on them.
Metrics from this layer indicate:
- If an innovation team is able to disseminate learnings and insights from pilots to the broader organization, and is able to bring cross-functional leadership teams to make the right decisions when it comes to proceeding, pausing, or killing a project.
- If successful ideas are validated, and if the promising ones are not stuck in inboxes and under the wraps of organizational turf wars. Once scaled these ideas should increase revenue, serve customers, and lower operating expenses.
- If the organization is able to pivot, pause or stop initiatives that showed higher risk of attaining potential value. This means that the organization is acting on signals or insights critical to the future of the business and allowing only value-added initiatives to move further.
Layer Three: Customer Impact
This layer consists of customers who experience the new products, services, processes, and business models created by the organization. This is a mix of newly acquired customers and a large base of existing satisfied customers. As these customers stay happy and satisfied, good revenues for the organization are generated.
There is no silver bullet or a quick solution for measuring the impact of innovation…
An innovative organization should be agile to predict and respond to customer needs. The ability to respond to customer needs comes from innovation initiatives taken up earlier by testing and validating customer insights and the adoption of those learnings to create new products and solutions.
Metrics from this layer indicate:
- If the organization is acquiring new customers and moving into new markets.
- If the customers are adopting new products and services.
- If the new business models are working.
- If the organization is retaining good customers
- If the customer satisfaction and referral rate is healthy.
These metrics are tracked mostly by organizations for financial reporting and for customer relationship management. Innovation teams can analyze them to gage how much revenue can be attributed to innovation programs. Since these metrics are lagging indicators, they cannot be influenced for the current period but need to be analyzed in order to arrive at corrective decisions for the future.
Layer Four: Financial Impact
This is the top-most layer in the hierarchy benefits from higher revenues generated by customers and lower operating costs enabled by internal teams, thus creating a positive ROI and increasing the shareholder value.
Metrics in this layer help indicate:
- If the revenue mix from new products and services is on a good trajectory as indicated by the vitality index.
- If the overall revenue for the organization is growing at par or above the market trend.
- Return on investment for innovation teams.
- What percentage of revenue is plowed back to fund innovation initiatives.
Implementation of the Model
There is no silver bullet or a quick solution for measuring the impact of innovation, but this model brings structure to the process of measuring the health of innovation programs and their impact. Here are four steps to implement this model in your organization:
- Develop a strategy for the innovation program. Have a clear idea on purpose and goals of your innovation program. Ask questions like: Why is the organization supporting this program? What is the purpose of innovation program? Who are your key stakeholders and persona? Instead of writing up a 20-page business plan document, my recommendation is to use visual recording tools and Lean Canvas to answer these questions. Once the purpose and goals are clear, develop a strategy for your program and decide the innovation initiatives (Layer One of the model) that caters to overall purpose and goals.
- Socialize this model. Use this model as a communication tool to discuss how innovation initiatives result in higher ROI and how dots are connected in the organization until majority of stakeholders understand the model, its layers, and how innovation initiates can add value to the organization in the long run. Take business leaders’ input for key initiatives and metrics that are suitable to the objective of the program and the organization.
- Decide the metrics to measure, evaluate, improve. Create a cross-functional team to arrive at maximum three to four metrics for the bottom two layers of the model (Innovation Initiatives layer and Internal Impact layer). For the top two layers of the model, focus on existing metrics that the finance uses, instead of reinventing the wheel. Monitor metrics at the customer and finance impact layers and see what percentage of credit can be given to innovation initiatives. It may take one or two years before innovation programs start creating impact at these layers.
- Plan, Execute, Measure, Re-plan: Get into the routine of execution, measurement, and analysis of results on quarterly basis. See what changes should be made to meet objectives and purpose of your innovation programs.
Innovation initiatives are like tug boats changing the direction of large ship with care and precision. So, be proud of small impacts that you have every single day; over a period, you are charting the larger corporation towards new territories and markets.
Click here to download a PDF with suggested metrics to track the health and impact of innovation at any of the model’s layers.
- PMO Model by Ravi Kanniganti
- Lagging and Leading Indicators
- Measuring Innovation by Julia Kylliäinen
- “What Big Companies Get Wrong About Innovation Metrics”
- “Benchmarking Innovation Impact 2020” Research by InnoLead and KPMG
- “Innovation Teams & Business Units: Allies or Adversaries?” Research by InnoLead
- The Startup Way by Eric Ries
Click filename(s) to download and view.