How Do You Measure Innovation?

A practical hands-on guide for measuring your IT innovation program. Measure performance, competence and strategy to take the black art out of innovation.

For too long now innovation has been viewed as a black art. Business journals, such as Business Week and Fortune, that regularly publish their lists of the most innovative companies, select top performers based on surveys of CEO/business executives, not hard data of performances. Similarly, few managers have the required metrics to make informed decisions about their innovation programs. Therefore, managers of all types, and IT managers especially (since they are often out of the strategy decision-making loop), have only a vague sense of the innovativeness of their company and their department; they have little or no means to assess the effectiveness and efficiency of a particular innovation program. Over the last decade, however, many organizations and their IT departments, have successfully implemented enterprise-wide as well as localized innovation programs. Along with their successes, and some pioneers' failures, we now have a more thorough understanding of what and how to measure an organization's innovation program.

What to Measure?

Ultimately, innovation is a means to an end — a competence for generating profitable growth opportunities and improving the organization's competitiveness. A a holistic measurement system needs to have three perspectives: performance, strength of the competence, and strategic application of the competence. The performance perspectives report out the "returns" or "results" of an organization's innovation program(s) while the competence perspectives report out the ability to envision and implement innovative opportunities. The strategy perspective outlines the criticality and impact of innovation in the organization's strategic direction.

Performance Perspective

To measure the performance, most companies simply track the revenues and profit contributions of their new products and services. Given the flexibility and capabilities of today's ERP and/or financial management systems, tracking investment, direct cost, direct revenues, profit margins and other revenues and profit measures is not highly complicated, as long as the specific products or services can be labeled appropriately. The same is fairly true for IT organizations. While it's hard to quantify the total value of the IT department with any precision, it's substantially more feasible to value the cost and benefit of specific new programs and initiatives.

Additionally, given the lag time between the envisioning of innovative ideas and commercialization of these ideas, it's important to measure one's innovation pipeline. Specifically, managers should track the value and status of the innovation pipeline.

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One way to estimate the value of pipeline is to sum the estimated net present values of all the opportunities in the pipeline, in a similar way as pharmaceutical companies estimate and track the value of drugs in various stages of development. Specifically, the value of the "innovation pipeline" is the sum of the values of opportunities, each then discounted by the probability of getting to market and time-value, for example:

VALUE = NPV of Opportunity 1 x Probability of getting to market (based on the stage it's in)

+ NPV of Opportunity 2 x Probability of getting to market (based on the stage it's in)

+ NPV of Opportunity 3 x Probability of getting to market (based on the stage it's in)

& + NPV of Opportunity N x Probability of getting to market (based on the stage it's in)
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