Innovation Management

Measuring Innovation - The Ultimate Guide to Innovation Management KPIs

Post by
Shereen Qumsieh
Measuring Innovation - The Ultimate Guide to Innovation Management KPIs

Here at Pondr, our mission and passion is all about the ideation process, which is why innovation is such an important topic for us to flesh out. If it’s your first time visiting our blog, or you’re new to the conversation around innovation, check out some of our previous articles outlining what innovation actually is, the importance of it for business and society as a whole, the different types of innovation that exist, as well an indepth look at disruptive innovation in particular. Today, we are looking at innovation again - but focusing on the measurement of it: the why, the how, and the tips and tricks we’ve picked up along our research journey.

Why do we measure innovation?

You may be familiar with the term KPI (Key Performance Indicator), which is used to study how well a business is achieving its goals through a measurable value. A KPI is something you use across all levels of an organisation to evaluate targets.  While KPI’s are common across the different sectors of a company, it often falls short in the innovation department, with “only a ⅓ of all Fortune 1000 companies using formal metrics to measure their innovation output over time.”

There is a strange disconnect between the fact that 77% of CEO’s view innovation as a top priority, yet only 22% have actually implemented a metric system to measure it. In a recent McKinsey & Company podcast (which is also available as a transcribed article) titled ‘How to take the measure of innovation’, Erik Roth, Guttorm Aase, Sean Brown and Sri Swaminathan provide valuable insights into the performance of innovation. They discuss the phenomenon whereby their clients are often ‘concerned with the activity of R&D and innovation as opposed to the output and the impact of that output on performance.’ Meaning, while a company may be addressing or measuring the number of projects or ideas going ahead, they note they “rarely see an organisation taking a thoughtful approach to how it actually measures the outcome of its innovation in R&D over time.”

Benefits

When you track the relationship between innovative activities and their outcomes, you are essentially making sure the efforts you are putting in are going in the direction you want, and paying off. Breaking it down a little further, measuring innovation will:

  • Give you a better idea of how effective your innovative projects are
  • Create a healthier workplace culture, motivating employees as well as holding them accountable
  • Helps to reduce time and resource waste, and distribute assets effectively and efficiently

Diversity of metrics

It is important to remember that metrics are not standard, it is not a one-type fit all situation. You should be open to the various methods which suit your project and flexible to change when the results turn out differently than you had expected. There is no right or wrong, but rather suitable to the individual scenario.

Innovator’s Dilemma

This is a very important concept to bear in mind when measuring your innovation journey. The term - coined by Harvard professor and businessman Clayton Christensen in his 1997 book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail -  explains why traditional modes of measuring innovation, such as solely looking at profit, does not give a holistic picture of a company’s potential trajectory. He uses his theory of disruptive innovation - the “process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses” - to demonstrate this. Take Netflix for example: in their early stages, the market was not yet ready for their innovative ideas to take hold. What they offered was still proving inferior to Blockbuster customers, but eventually as the technology began to change as well, it became profitable within the mainstream. Christensen notes that this phenomenon creates an S-curve whereby a product initially has no value to mainstream customers, but in time and with new iterations, the value expands quickly and exponentially.

If Netflix had measured their innovation methods during the beginning stages against their competitors, the results would have made them want to abandon ship all together. That’s why it’s so important to know what stage and type of innovation of your product or business fits into, before trying to measure it.

How to measure innovation

Measuring innovation does not necessarily have to be tricky or elusive, rather it is just particular and unique to each situation. There are many ways to measure it, whether it be focusing on the metrics of a new product, staff competencies or even the leadership style being used. Generally, measuring innovation can first be categorised into Input and Output. Only focusing on one area will not give a complete picture, which is why it’s important to take a combined approach:

Input Metrics

Measures what is being invested into the business or product and the allocation of those resources, such as employee time, the ideation process or investments in new technology for research and development. If a business was in its early stages, it would make sense to focus more heavily in this area. Within this umbrella would include 4 main metrics areas to pay attention to:

  • Capabilities
  • Structure
  • Culture
  • Leadership Strategy

Output Metrics

Measures what you’re getting out of the investment and the impact of your innovation investments, studied by releasing the product into the market, and analysing the outcomes such as revenue. Studies could include how many new products are being launched, the return on investment coming in, and revenue or growth taking place over time. As discussed with innovator’s Dilemma, focusing on this area too soon may be ineffective. Within this umbrella would include one main metric defined as:

  • Business and product

Let’s look at these 5 metric subcategories a little closer:

1. Capabilities

Capabilities refer to the employees/people that make up a team, and what they bring to the table and the term describes the collective alignment of a team's skills and expertise within a company.  What can the people on a team do? What motivates them? While the term competency is used more to describe an individual, capability is what spans across an organisation. An assessment will help not only pinpoint the strengths and weaknesses across a team, but helps management come up with strategies to utilise or deflect them. Some useful questions in this are might be:

  • Do employees understand what is expected of them?
  • How many employees are involved in the ideation process?
  • How much is being invested in employee education to study more innovative methods?
  • Is there a method in place for tracking employee idea contributions?
  • Do they share the same values as what your company stands for?
  • Does your team show strength in finding new recruits?
  • Does your team have a strong relationship with your customer base?

2. Structure

A smart company will understand that no single innovative approach will be sufficient or permanent for a company in its entirety over the years. For true diversity and dynamism within a company, there must be a balancing act: looking toward the future to explore new opportunities while at the same time paying attention to existing strategies which do not need disruptive change. The most effective is an ‘ambidextrous structure’ which is done by creating separate units within the organization, and each one having its own unique set of processes and cultures. What type of ambidextrous approach will you take?

  • Separation: are there separate divisions within your company that run independently from the other, but are operated from one top-down management team?
  • Switching: does your company prefer to continually ‘switch’ between the methods so as not to remain static?
  • Self-organization: would it be more beneficial for each unit or team to manage itself, and choose the best route for their unique and specific goals?
  • External ecosystems: will you outsource people externally with the necessary skills to specialize in a specific area?

3. Culture

Innovation culture can be defined by the details of an organization’s values, structures, habits, and practices. For a healthy innovation culture to thrive, there must be a strong sense of collaboration with shared collective values and a shared purpose. Because all cultures have consistent and observable patterns of behaviour, it is something that can - and should -  be analysed or diagnosed for the better.

In an article by Michael D. Watkins on culture and the power of incentives, he notes that because culture is a dynamic and ever shifting entity, it should be managed as a continuous process, therefore the culture of organization should always be developing. Culture is something that can be moulded and materialized through creating the right environment - one invested in fresh perspectives and alignment of purpose. Some questions might be:

4. Leadership and Strategy

In business, innovation is the philosophy around harnessing new ideas to create value for people and drive economic growth. The innovation strategy is the plan or the blueprint for making this happen, and allows everyone across the team, including investors, to get a transparent look at the activities and key initiatives taking place to make that goal happen.

There is obviously no one way to approach this, as this will depend on the specificities of the project or business, but there are a few good pointers that can help shape the plan. First things first, you must determine the why factor before moving anything forward; what do you want to achieve by doing this? Once you identify your focus, you can establish which innovation system and technique is most suited. It is then time to assess your team's capabilities; what are the assets required to succeed? Who needs to be collaborating across the organisation to bring it forth? It is also important to know both your customers and your competitors; can you place where you sit in the current market? Some ways to measure these questions could be through studying the amount of time the management team spends on implementing designated innovative activities, or if they are in an industry training program. One of the most important factors for management is to make sure they are steering employees' efforts in the right direction so as not to incentivize anything that is counterproductive.

5. Business and Product Performance

As mentioned above, this subcategory would go under ‘output metrics’ and is more focused on the actual results of all the aforementioned efforts. This area is where the majority of metrics take place because it is a lot more direct. It is far less complicated to analyse how many products were launched, how much revenue was earned, or how many patents were gained. Some more areas you could look at would be:

  • Where is the revenue coming from? Study the international and domestic markets
  • How much is being made from your patents in terms of royalties and licensing?
  • Study the growth rate of similar products

Tips and tricks for designing your measurement strategy

As we mentioned before, choosing how to measure and implement metrics and KPI’s is not the same across the board, but depends on the market you’re in, the industry, the maturity of your business, the expectations of customers and investors as well as the type of culture of the company. Therefore, when designing your own unique set of KPI’s, it is vital to keep them consistent with the bigger picture of your innovation strategy, and keep these key points in mind:

Understand the lifecycle timeline of innovation

When we say innovation lifecycle, we are referring to the term used to describe the stages of its process. It is useful to break it down so you can see which tools and methods will be most relevant for each area. In a nutshell, there are three main sections: the learning stage, the innovation stage and the impact stage.

The learning stage will be the most uncertain time for a business or product design, meaning the focus should be more towards input metrics. The middle stage, or innovation stage, yields a medium level of uncertainty and is when new ideas are tested out, tried and practiced. The impact stage is where you will want to be focusing on output metrics as it holds a low level of uncertainty.  On a timeline, the innovation lifecycle charts the level of uncertainty, decreasing over time.

Implementing unique metrics across a team

Just as each stage of the process needs a different metric system, so too does the diverse and varied units within a team. A sales and marketing department will not benefit from the same KPIs as your research and development team. While everyone in the organisation should be working towards similar goals such as customer satisfaction, innovative ideas and company growth, there are individual avenues needed from each team to reach those same goals.

Stay Focused

More often than not, less is more. This is one of the top pieces of advice from business management advisors because using too many metrics can create a cloudy picture that may be inconsistent with the company’s innovation strategy. It is a similar rationale to quality over quantity; if you have less goals to focus on, you can be more rigorous and thoughtful about every inch of the process.

This is especially true if you’re just starting out with KPI’s and have not built up a company infrastructure around measurement.  In addition, don’t fix what’s not broken: if there’s a proven approach that’s been working for your company, why cause more clutter in measuring the same thing in a different way? This sounds contradictory to the principle of innovation, however, if one approach is used, the results will be more uniform and standardised allowing greater perspective over a longer period of time.

Balance and diversify

While this next tip might sound contradictory to the above advice of keeping in minimal, diversity doesn’t equal clutter or excess.  It is important to find a good balance of KPI’s and diverse strategies. In other words, make sure you are blending different elements of innovation measurement to get a more holistic perspective. You will most definitely need to be looking at both input and output metrics, but within that make sure you are not focusing solely on financial metrics and ignoring staff competency metrics. Looking at product metrics are also just as important at leadership metrics. A business is the sum of all its parts, so don’t ignore any area.

Conclusion

Innovation is an exciting space to invest your time and energy into, and measuring how its being used will help a business become more organised, efficient and groundbreaking. Overall, it will help to know you are going forward in the right way. Remember, it is not all about output and financial metrics, it is important to look at the whole landscape, from markets, business models and services to employee engagement and the whole ecosystem of an organizational structure.