People, Technology, And Business Viability Are Key
Innovation is novelty that creates value for customers and stakeholders. While more than 80% of executives surveyed by McKinsey in 2021 said that innovation was one of their three key priorities, only 10% are content with their team's innovation efforts. If innovation is ubiquitous, why is it so difficult to achieve and sustain? This series of the "Innovation Blueprint" articles will explore critical elements of cultivating an innovation ecosystem, including measuring and scaling innovation for your organization. This article focuses on 3 ways to measure innovation.
Why Measure Innovation?
Innovation drives performance outcomes which drive growth. Measuring innovation allows your organization to gauge its ability to continue to grow and develop products and services that address unmet customer needs. Innovation is also a key element of motivation, inspiration, engagement, and growth for the people in your organization. When leaders commit to measuring innovation, they send a strong message of championing new ideas, creativity, and calculated risk-taking, which are critical in developing and retaining talent in the organization.
Measuring innovation and rewarding the creative innovators in your organization that generate it also increases motivation and strengthens the culture, generating more innovation, which in turn delivers growth and continuous improvement. Innovation can also increase efficiency because innovative processes deliver products and services better, faster, and safer.
Additionally, by measuring innovation, leaders get a better sense of which projects, initiatives, and products generate the most revenue and could benefit from additional resource allocation. As a result, when the organization is more innovative and efficient, employees, customers, and stakeholders are happy. The key to measuring innovation is focusing on at least the 3 elements of innovation: people, technology, and business viability. The metrics offered in this article are only a few that are available for organizations to consider. It is vital that the metrics are reviewed together to enable leaders to gauge the innovation level in their organization.
1. Measuring The People Element Of Innovation
People comprise the most essential element of innovation because they come up with novel ideas and execute them. Ensuring people in your organization have adequate training around innovation and are empowered to develop an innovation mindset are both important. Without training, people will lack the tools and knowledge to perform. Without empowerment, they will not be motivated to take the risk required to innovate. Without an innovation mindset, they will not be able complete the journey of innovation which is often long and arduous.
The question is, how do you measure the people element of innovation to ensure people have adequate training and empowerment to innovate? Creating an innovation competency model for your organization can help you define the skillset and traits that align with your organizational culture. Next, you will need to offer the learning opportunities that will enable the people to build those skills. Conducting a gap analysis between the competency model and the skillset and motivation of the people in your organization can provide a gauge of the innovation skills readiness. The smaller the innovation skillset gap, the higher the degree of readiness, and vice versa.
2. Measuring The Technology Element Of Innovation
One way to measure innovation is the number of patents filed by an organization or a country over a year or another specific time frame. In fact, this is how a group of Stanford professors measured innovation in the United States: by digging into the data of 9 million US patents over 200 years. The research revealed that patent description words that did not overlap much pertained to significant innovation. Further analysis of patent description words of patents that followed showed word similarities that denoted an important innovation upon which others were developed. Also, the research revealed that not only startups but also established companies, the military, and universities developed many patents.
Today, a more practical way to measure the innovation of the technology element specifically in your organization is to look at the ratio of your organization's current year profit divided by the previous year's R&D expenditures. This metric, known as RORC (Return on Research Capital), measures the organization's profit as a result of R&D spending. For example, in 2009, Apple's RORC was $11.84, meaning that for every dollar Apple spent on R&D, it generated $11.84 in profit. Conversely, during the same year, Nokia's RORC was the equivalent of $1.32, meaning for every dollar Nokia spent on R&D, it generated $1.32 in profit. Fast forward to today, and as we know, Nokia's market capitalization is $24.67 billion and the stock is trading at $4.39, whereas Apple's capitalization is $2.29 trillion and the stock is trading at $142.45.
3. Measuring The Business Viability Element Of Innovation
To calculate the business viability element of innovation, you can look at the number of startups that get funded. A more sophisticated metric is the Commercial Confidence Index (CCI), which measures the cost of R&D in Known Customer Needs over the cost of R&D in all projects. The metric requires that you create two project buckets: one for known customer needs projects and one for all other projects. This metric forces you and your team to zero in on unmet customer needs and focus on innovation that impacts products and services designed to meet these needs.
Many organizations do not know how to separate their projects in each bucket, and others do not even have known customer needs. To uncover customer needs, organizations must focus on collecting the voice of the customer through surveys, Net Promoter Score polls, and small discussion groups with customers.
Conclusion
This article offered 3 "starter" metrics to help you navigate innovation measurement across the people, technology, and business viability elements of innovation. These metrics include an innovation training readiness metric for the people element of innovation; counting the number of patents and the Return on Research Capital metric for the technology element of innovation; finally, the Commercial Confidence Index, which measures the business viability of the innovation in terms of meeting known customer needs.
