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.

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A few years ago, a major global commercial bank began an innovation program in its IT organization where employees around the globe share and nominate improvement opportunities. These opportunities were elaborated and evaluated by the online communities, and the most attractive ones were then adopted by regional operational units. About a year into the program the bank was able to quantify the value of output by assessing the benefit of each opportunity implemented. Then, it revised the opportunity submission form to include an estimation of benefits (in magnitude, not a precise number), and this benefit estimation was further refined as the opportunity went through online elaboration/evaluation and implementation. Now, the bank's IT organization reports to its management team the value of its innovation project portfolio and results.

The valuation process of the IT innovation pipeline is similar to the valuation of a new product pipeline, although this bank's IT innovation pipeline has fewer stages than the typical new product development pipeline, and the benefit/cost valuation is based on estimation, not a detailed accounting of actual revenue generated and cost incurred.

Once this calculation is standardized, the change in the total-value of pipeline can be calculated for each time period. Then, the ratio between this number and the investment in innovation for the same time period is a proxy for return on investment for innovation (innovation ROI). An implication is that the value of the pipeline and ROI can be increased by adding attractive opportunities in addition to moving opportunities through the pipeline.

Similarly, at any one time, the number of opportunities at each stage of development is a quick overview for the health and growth of the pipeline.

Together, overall revenue/profit contribution from innovation, value of innovation pipeline, status of innovation pipeline and innovation ROI can offer management a fairly robust view of innovation performance.

Competence Perspective

Since innovation is a means to an end, savvy CIOs and IT managers go beyond measuring the results of innovation. They also assess the strength or capacity of this competence. This perspective assesses the extent to which the organization's skills, processes, culture, and conditions support the conversion of innovation resources into opportunities for business renewal.

The inputs of this perspective are the preconditions for innovation, i.e. the extent to which an organization's skills, tools, culture, and values are adapted to innovation. For example, organizations can assess employees' personal competence levels, calculate the numbers of employees at various performance levels, measure employees access to innovation training tools, and benchmark the breadth and quality of training/professional development programs.

The codification of the capability measures the degree to which this capability is embedded and standardized. While the innovation activities will always rely on the skills and knowledge of the practitioners, many of the methods and techniques can be codified, instead of reinvented at each iteration. In this area, organizations can measure the extent to which the business and application implementation processes are codified and embedded, and the level of automation/information system support available.

The outputs of the capability view measure the organization's success at providing new technology-centric capabilities to the enterprise. For example, it might measure new competencies (i.e. proficiency with a new technology, adoption of a new application development approach) or newly created strategic applications (i.e., new pricing application, new supply chain management system). As with the resource view, measurement of both inputs and outputs is necessary to monitor the extent to which capability view inputs seem to drive capability view outputs.

The input, codification, and output measures should offer management a succinct perspective of an organization's competence strength in innovation.

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