Don't miss out on this: measuring innovation and following the right KPIs is essential to validate, refine and optimize your strategy.
Are you actively measuring and assessing your company’s innovation over time?
If so, nice work. If not, chances are you’re missing out on some huge advantages.
Innovation is a systematic practice that should be measured like any other aspect of your business. As Peter F. Drucker said way back in 2002, “innovation is real work, and it can and should be managed like any other corporate function.”
In this article, we’ll explain why it’s so important to measure innovation, and will look in-depth at the metrics and KPIs you can use to track your innovation over time. We’ll also examine some great examples to show the practical value of measuring innovation.
A lot of people think about innovation as a mystical process of inspiration requiring natural genius or inborn talent. However, this downplays the role of deliberate creativity and structured effort in generating new services, products, business models and experiences.
In reality, innovation is about structuring creativity.
Once again, Peter F. Drucker, the father of modern management thinking, has a few wise words to offer: “Most innovations, especially the successful ones, result from a conscious, purposeful search for innovation opportunities.”
So, if innovation is a conscious and purposeful practice, this means it can - and should - be measured on an ongoing basis, just like any other company metrics.
Sadly, estimates suggest only a third of all Fortune 1000 companies use formal metrics to measure their innovation output over time. McKinsey reports that while 77% of business leaders see innovation as a priority, a mere 22% have metrics in place to measure innovation.
This suggests there is a vast unknown innovative potential out there waiting to be measured, assessed, and put to work more efficiently. After all, keeping track of this innovation via formal metrics and KPIs has some pretty amazing benefits.
By committing to measuring innovation, you can encourage your people to be more conscious of the need for creativity and fresh thinking, no matter what their day-to-day responsibilities might be.
If you regularly measure your company’s innovative output and communicate these measurements, this helps encourage staff to think about innovation accountability on a daily basis and take responsibility for finding new ways of doing things.
Have a look at electronics and whiteware company Haier. Not only does Haier track and measure its innovation in detail over time, it also offers innovative employees the ultimate recognition: having new products named after them.
This kind of recognition, combined with the company’s approach to measuring innovation, incentivizes each employee to be accountable for innovation, no matter their role.
Measuring innovation is a great way to make creativity and invention a core part of every employee’s responsibilities, and to celebrate the creativity that exists within your company.
The more you know about your innovative outputs, the more you can recognize those responsible for these outputs, which only serves to encourage further innovation.
We can see this in action at Penn Medicine’s regular innovation tournaments, held to recognize and celebrate employee creativity. The results of these tournaments - including new products and systems - are then measured alongside company-wide innovation metrics.
According to Christian Terwiesch, University of Pennsylvania Wharton Professor, many companies are falling behind when it comes to measuring innovation. “These places have all these potential innovations flowing through the system,” he says. “They should start measuring that overall process just like they'd measure a production process.”
“Where do the ideas come from? How many did we try out and how many then moved to the next step of refinement? Why?”
When developing new products or services, there’s always a fight to make sure resources are allocated to support the most disruptive innovations and solutions. A lot of the time, companies do this by taking a stab in the dark and hoping things work out.
However, by tracking innovation KPIs and metrics, businesses have a lot more information to help inform resource allocation. This means innovation leaders can put dollars and staff hours where they’re needed the most and shape their innovation pipeline effectively.
Many business writers think about efficiency as the enemy of innovation and suggest that true innovation happens when employees have unstructured time to think and create. However, the reality is a little more nuanced than this black-and-white view suggests.
By encouraging innovation, businesses don’t necessarily have to sacrifice staff efficiency. In fact, measuring innovation can encourage people to be more efficient with their creative efforts, and to think more about the potential return on investment for each innovation.
This is because when employees know innovation is being tracked and measured, they tend to be a lot more serious and deliberate when it comes to creative exercises.
A great example here is manufacturing giant 3M. While 3M famously allocates 15% of its employees’ time for blue-sky thinking and product innovation, it also requires employees to demonstrate the results of these efforts. The company then tracks these results in detail.
In practical terms, measuring innovation with detailed metrics is also a great way to appease company investors who have provided you with the capital to grow.
If your sponsors can see in detail the direct benefits stemming from their investment in innovation, they are more likely to back new ideas and be tolerant of the occasional innovation failure.
So, there’s a great case for why companies should measure their innovation with detailed metrics. However, the nature of innovation can make it a challenge to measure.
As PwC notes, unlike the product development lifecycle, innovation is not a standard process with defined milestones and checkpoints. Even world-changing innovations sometimes move in fits and starts, such as the nearly four decades it took for household electricity to catch on.
Innovative systems and solutions also tend to have a much larger number of stakeholders, making it challenging to measure and recognize individual contributions.
Despite these challenges, businesses can measure innovation with a mixture of:
Here, we’ll also examine the advantages and limitations for each of these categories of metrics, as well as looking at some of the more commonly used KPIs.
First, though, a quick word on input vs. output metrics.
Input and output metrics represent two different ways of measuring innovation.
Input metrics measure the quantity of innovation enablers your business is investing in. For example, input metrics can include the hours of employee time allocated to innovation exercises or the total value of company investment in innovation.
Output metrics measure whether your innovation investments are having the desired effect. For example, two common output metrics are the number of new products released to market in the past two-three years or the revenue generated from these products.
While tracking input metrics is useful, input metrics don’t give you the whole story of company innovation. They only speak to what you are putting into the innovation process, not what you’re getting out of it.
To get a more complete picture, it’s best to use a mixture of input and output metrics. For example, rather than simply measuring R&D spend (an input metric), you should measure this spend against the revenue generated by products recently released to the market.
This combined approach helps to tell both sides of the story: the investments a company is making in innovation, and the results of these investments over time.
A majority of companies use some kind of timesheet system to understand what employees are spending their time on. These timesheet systems offer a simple way to measure innovation.
For example, for each division or project area, a company can designate codes for time spent innovating (e.g. “blue sky thinking” or “product brainstorming”). This provides a straightforward input metric for innovation, one which can easily be compared across employees and teams.
While employee innovation time provides a quantitative record, it doesn’t say anything about the quality of these efforts, or the innovations resulting from this time.
However, timesheet metrics can still be a helpful way for investors, sponsors and senior management to understand how much company time is spent on innovation overall.
One way to get a more complete picture? Combine timesheet metrics with new product metrics.
Whenever a company launches a new product or service, it can track the resulting sales revenue and measure this against the release of other new products or services. This simple metric provides a helpful record of the value of innovation over time.
To give a fuller picture, companies can also track the number of ideas stemming from internal sources, versus the number of ideas found externally (for example, via customers, clients, or through open innovation exercises).
Many companies track the total revenue value of innovation by assessing the percentage of company sales stemming from recent products. For example, 3M stipulates that a minimum of 30% of each division’s revenues must come from products introduced in the last four years.
However, this approach doesn’t always work so well for market-defining products. For example, consider Apple’s world-changing invention, the iPod.
If Apple counted iPods as an innovative product - which they most definitely were - then the entire value of the iPod market (representing almost 55 million units at its peak in 2008) would count as a product metric.
While this would certainly result in some impressive numbers, the colossal value of the iPod market would risk distorting the applicability of the metric. In a sense, the runaway success of the iPod makes it unfair to compare it to other innovation efforts - even for Apple.
As McKinsey suggests, a way to get around this is to compare the rate of R&D-to-product conversion with the sales margin of recent products. Taken together, this combined approach can demonstrate a company’s innovation performance - even for disruptive innovations.
Tracking innovation using financial metrics isn’t just a great way to keep teams accountable for their budgets - it’s also a handy way to keep executive leadership happy.
For example, companies can measure financial KPIs such as:
These financial metrics help to explain the basic return on investment from innovation and allow companies to understand the extent to which new innovations are contributing to the profitability of the company.
However, too much focus on financial metrics can be an innovation killer, as it encourages safe investments. As examples like FedEx, Amazon, and Tesla demonstrate, companies need to back risky ideas in order to succeed, even when these ideas could be costly in the short term.
Training and competency metrics are another way to track and measure the process of innovation, and can help strengthen a culture of innovation throughout a business.
For example, companies can track:
Through tracking these metrics over time, a business can set staff competency KPIs regarding innovation. For example, each staff member must participate in a minimum of two innovation training exercises each year or must commit to 50 hours of innovation study each year.
Simple benchmarks like these help companies measure their overall commitment to innovation and help to incentivize spending time and effort on creative product solutions.
Management and leadership metrics help to recognize the role of the executive in fostering innovation and driving employees to be creative when responding to customer needs.
For example, companies can track the following leadership KPIs:
Keeping tabs on these metrics can provide an overall sense of how innovative a company’s leadership culture is, and what the company can do to promote innovation even further.
A great example here is General Electric, which keeps close tabs on the number of new patents coming from each division of the company, the revenues stemming from these patents, and the executive leadership members overseeing these patents.
However, focusing too much on leadership innovation metrics can risk ignoring the real drivers of company creativity: the employees. Companies should be careful to track innovation at all layers of their business.
In addition to the range of metrics above, there a couple of other useful frameworks companies can use to drive innovation:
So, that’s our overview of the five types of innovation metrics, and how you can use them to drive all types of innovation within your company, including incremental innovation and radical innovation.
But which innovation metrics and KPIs should you use?
This question will come down to your industry, the maturity of your market, your particular business culture, and the needs and expectations of your investors and senior leadership.
You should choose metrics that are consistent with your innovation strategy, and which match the areas of investment focus for the upcoming years.
Consider these factors, and develop your own “metrics mashup” covering the areas of company creativity that matter most to you.
To ensure you capture all elements of innovation, we recommend using a blend of the five approaches above, focusing on the following metrics and KPIs:
When it comes to establishing innovation metrics, it’s important to approach the exercise with patience and tolerance for evolution. Chances are you won’t get the settings right on your first attempt, and you may need to adjust your approach over time.
Bear in mind this advice from McKinsey: “In seeking the ideal metric, one should not let the perfect be the enemy of the good”.
While you’re working out which measurement approach might suit you best, we thought it might help to have an extensive list of useful and relevant innovation metrics and KPIs in one spot:
As we’ve seen, tracking and measuring innovation can result in major benefits for companies. However, there are also some risks you’ll need to watch out for.
If you focus too much on metrics, you risk encouraging your employees to hit good numbers, rather than being truly innovative. This is especially the case if you decide to make innovation KPIs part of employee performance reviews.
Remember, innovation takes time, and not every creative concept can be measured as easily as the next. You wouldn’t want to discourage a potentially world-changing idea just because it didn’t seem financially feasible in its early stages.
While it may seem like a good idea to rush off and measure everything under the sun, there’s plenty of evidence that using too many different metrics can result in a confused and inconsistent picture of company innovation.
So, start off nice and easy, get the right people on board, and pick just a handful of innovation KPIs to begin with.
Trust us - your staff will thank you.
When measuring innovation, you may be tempted to tweak things as you go - especially if you’re an incoming CIO who wants to stamp your mark on the place.
However, sticking with one measurement approach over time will ensure your results are standardized and can be compared between quarters. Stick with something long enough, and you’ll be able to tell a convincing story of your innovation trends.
It is important to avoid rushing into a set of metrics.
As Scott Kirsner pointed out, too many businesses set metrics and KPIs without considering their long-term suitability. Because of this, results can be confusing and can lead to poor decisions.
There’s an incredible potential out there for companies to boost their creative efforts through tracking and assessing innovation. Unfortunately, a lot of businesses don’t put the necessary time and effort into implementing and relying on innovation metrics.
Not only does measuring innovation have huge benefits for employee work culture and efficiency - it also encourages innovation accountability and a focus on inventive solutions for customers.
No matter what industry you’re in, that’s great news.
The best choice of innovation metrics and KPIs for your business will depend on your industry, your work culture and, most crucially, your innovation strategy. There are plenty of factors to account for here, and it’s important not to rush things.
Consider the five types of innovation metrics we’ve outlined here, and take the time to develop a “mashup” of KPIs covering off your particular innovation priorities. Also, be sure to communicate these to your wider organization - it’s crucial for everyone to understand these in clear terms.
Once you’re up and running and your people are gathering data, you’ll be able to tell a convincing story when it comes to company-wide innovation and creativity.
Remember, your goal is to make innovation a daily priority for every layer of your business, from product development to organizational support and executive leadership. Measuring innovation can help you do just that.