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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Strategy Perspective

This perspective assesses the degree of strategic importance of innovation in the entire organization and IT for the overall organization. It uses measures such as company's leadership involvement in innovation activities, the establishment of formal processes to promote innovation, extent of innovation is embedded into performance metrics, and the criticality of IT in supporting the company's revenue and profit growth.

Three Common Pitfalls of Innovation Measurements

As more and more organizations embrace innovation as a critical organizational capability, many have also gained operational experiences at measuring innovation. Amongst these pioneers, they have experienced the following common mistakes:

Setting arbitrary high targets or hurdles for innovation projects. While many organizations have found their innovative products/services performed better—in terms of profitability or growth—than their traditional products/services, to arbitrarily set higher hurdles or performance targets could unnecessarily exclude a set of high potential opportunities. For example, one U.S.-based financial services/insurance company considered using a higher cost of capital for evaluating innovation projects. While it was correct to assume more unknowns or obstacles for innovation projects, these knowledge gaps didn't automatically translate into financial risks. Under such a high cost of capital constraint, the company would not have pursued an innovative opportunity that attracted consumers with small initial deposits but then actively grew these accounts over a long horizon. Given that this offering had been based on existing products and services, the financial risks were already well analyzed and mitigated so that, subjecting this opportunity to a higher cost of capital would have caused this company to forgo its now successful new business.

Implication for IT: When implementing a new technology or applying a new application development approach there are many unknowns. So, the budgeting process should create the appropriate buffer (time, cost) to account for the unknowns. Then, setting the project with higher hurdle would be "double-counting" the risk.

Placing too much emphasis on any one measure. The three perspectives and a range of measures offer a holistic picture of innovation for managers, and placing too much emphasis on just one or a few of the measures could lead to unintended consequences. For example, one medical equipment manufacturer focused on getting as many employees as possible trained on innovation, but the lack of depth by any trainees kept the organization from fundamentally altering its culture, business processes, incentive system and other enablers of an innovation system. Another organization measured every employee's innovation revenue contribution, and this diverted a high amount of resource on debating if commercialized products/services were innovation. The organization would have been better served if that same resource was applied to improving existing products/services or envisioning/developing novel products/services.

Implication for IT: Just like enterprises need to apply the entire spectrum of innovation measures in managing its innovation program, IT managers and executives should utilize the entire spectrum as well.

Separating measures from business decisions. Years after a consumer product manufacturer began embedding innovation across its entire organization, it successfully trained a critical mass of innovation practitioners and constructed a robust pipeline of innovation opportunities. Along the way, this company automated tracking of revenues and profits from innovation, and codified a range of business processes. Then, it decided to delegate the decision of "tagging" innovation to products/services in its ERP to a committee of middle managers. The result was diverting resources from applying innovation thinking to improve products/services ex ante to debating if specific products/services met the innovation definition ex post of the decision to pursue these opportunities.

Implication for IT: While estimating benefits and quantifying the value of innovative programs/initiatives help IT and enterprise executive make informed business decision. But, ultimately it's a business decision; so, don't let the desire to archive some performance target supersede business sense.

Smart Metrics for Better Decisions

Innovation is a means to an end. Therefore, organizations should measure across the perspectives of performance, competence and strategy. These three perspectives help managers understand the results, the capacity for performance, and application of innovation. However, don't assume a sophisticated or comprehensive measurement system replaces the need for management deliberation and decision-making. Successful innovation pioneers develop their innovation measurement system in parallel with management and business decision processes that take advantage of the rich information. In the end, it's not just about better knowledge — it's about better decisions enabled by better knowledge.

George Chen and Amy Muller are Chicago-based Directors of Strategos, a global a strategy and innovation consulting firm. Learn more about the authors and Strategos here.

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Copyright © 2010 IDG Communications, Inc.

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