Measuring Return on Innovation Investment
Posted 4 years ago
Most organisations look to financial measures to confirm that innovation efforts have been successful. However, there are many measures that an organisation can use to show value that goes beyond simply increased revenue, or decreased cost.
The first step to realising a return on investment involves understanding what your goals are (what success looks like – refer to your innovation strategy) and what you are going to measure to determine if you have hit those targets. It is important to define this early.
Of course, these goals and metrics may change over time. However, if you don’t start measuring, then how will you know what is working and what isn’t?
So, what can you measure?
Successful innovation programs require good idea in-flow. To get good ideas flowing in, you need engagement. Ideally, you will have ideas flowing in from multiple areas of the business at any given time. Engagement not only influences the quality of the ideas flowing in; it is an indication of organisational culture as well. Healthy organisational culture leads to peripheral benefits, such as improved productivity around business-as-usual activity, not just new innovations and R&D.
Engagement with external stakeholders (e.g. research organisations, collaborators) may also be a measure of success for an organisation, particularly those who are seeking to embed themselves in the ecosystem of a particular sector, market or industry.
Management tools like Brightidea enable innovation managers to easily monitor engagement with an innovation program, both at the enterprise level and at an individual challenge level.
Implementation is a measure of efficiency and effectiveness of your innovation program and the stage gate process you adopt for certain types of ideas. For example, how many ideas you identify vs. how many get implemented (simply measuring # of ideas generated can be a measure of engagement, but organisations should be focussed on quality ideas that ultimately get implemented); how long it takes to implement; and the risk factors associated with the ideas implemented.
As a follow-on step to implementation, measuring adoption of the idea once it has been developed is a key metric that can show value of the innovation program to the rest of the organisation. By pursuing adoption as a measurable, stakeholders become a focal point for the innovation process. Stakeholders are thus likely to be engaged earlier in the process, which ultimately drives uptake and sales down the track.
Financial metrics are often the first go-to for organisations to measure their innovation output. However, they aren’t always the best representation of success, particularly when some projects may not start to see financial returns for 2-5 years. Common financial metrics might include:
- ROI (return on investment – the amount invested in the innovation activity vs. revenues generated)
- NPV (net present value – similar to ROI but taking into account how the value of a dollar changes over time)
- IRR (internal rate of return – a measure of how quickly a return will be realised after the initial investment)
- Sales/revenues generated in new markets/customer segments/by new products and services
These are just a handful of metrics that an organisation might choose to measure the success of its innovation program. It is important to remember too, that the significance of certain metrics will change over time, depending on the maturity of the innovation program.
For example, if an organisation is implementing its first innovation program, it may place more emphasis on metrics around engagement, and idea flow, compared to an organisation that has been measuring innovation for some time and can measure financial returns on the portion of the portfolios that have been implemented and are generating cost benefits.
The important thing is to understand what your success factors are, and then identify and track the parameters that will enable you to measure achievement (or not) of those success factors.
Impact Innovation works with clients to identify appropriate success factors and metrics for their individual goals. We’re also the Australasia premier partner of the Brightidea platform. Call + 61 (0)7 3041 1128 and talk to us about how you can get better visibility of the value generated by your innovation program, and improve your return on innovation investment.
– Dr Cherie van Wensveen, Innovation Manager