Metrics to drive effective innovation that investors can buy
According to yearly McKinsey surveys, innovation is one of the top-3 priorities for around two third of companies. It is a critical enabler of differentiation and growth. To create a sense of urgency, align individual performance contracts, and convincingly communicate with investors about innovation, companies need to assess the effectiveness of and return on their innovation investment.
A question I am often asked is: “sure, but what metrics can we actually use?”.
Looking at it from the investor’s perspective, outcome-oriented metrics focus on what innovation delivers to today’s and tomorrow’s bottom line and, from there, to shareholder value:
- Revenue growth from new products/services,
- Customer satisfaction with new products/services
- Return on investment (ROI) in new products/services
- Percentage of sales from new products/services
- Number of new products/services launched
How long does new last?
For most of these metrics the company has to define what “new” means, in other words set the time period following launch during which the product will be regarded as new. Such time period may vary considerably by sector, as a function of the typical development time of products and their typical longevity in the market. For example, a pharmaceutical company may consider a product to be new up to 5 or 10 years after its launch, while a consumer-electronics company will probably regard a product as no-longer new after 1 or 2 years.
Where can new be found?
More fundamentally, the company also has to define what is new. Measuring revenue of new products and services comes straight out of the basic Management Information system. But innovation can be about process (eg a cheaper way of sourcing/manufacturing a product) or about business model (eg Apple’s shift from just selling devices to selling devices and content such as music or books). Setting up the system to apply the above metrics to process innovation or business model innovation will usually require some work, but it is essential if the company wants to:
- harness the value-creation potential of staff that are working outside the product development/marketing/sales circle (they too can create shareholder value!)
- be mindful of radical innovation opportunities that new business models often provide.
As in most activities, there are also useful process metrics to track in order to provide levers on the outcome-oriented metrics. R&D spending as a percentage of sales will provide a measure of the investment in innovation and sustainability. It is also one of the few ratios that is typically not too difficult to benchmark against competitors.
Other process metrics include:
- Number of ideas in the pipeline
- Number of ideas sourced from outside the organisation
- Number of products/services in each stage of the idea-to-commercialisation pipeline as a percentage of the total number of ideas in the pipeline
- End-to-end time-to-market
- Time in each stage of the pipeline
These indicators will be useful to identify where the blockers are be in the pipeline and provide managers with insights into how they can make the innovation process more fluid and fast.
McKinsey Global Survey Results about assessing innovation can be found at McKinsey Quarterly.