Explore how large corporations can measure innovation using the right Key Performance Indicators (KPIs). Embrace a culture of innovation to stay ahead with Studio Zao.
With 80% of executives claiming their current business models are at risk of disruption from forward-thinking rivals, it’s no surprise that 84% of business leaders view innovation as a critical factor in their growth strategy.
A combination of technological development, geopolitical uncertainty and the recent COVID-19 pandemic presents businesses with a pressing need to adapt and realign their focus to fit the needs of the new world. Embracing successful innovation ventures is vital to get ahead of the competition, differentiate from the status quo and future-proof your business.
However, when it comes to innovation, one of the biggest challenges for established organisations is knowing how to measure success, and how to justify investment in innovation projects that don’t naturally align with their business as usual operations.
Knowing which ventures to back, and which ones are stopping you from transforming, is difficult when your organisation steps out of its comfort zone. Successful transformation is all about knowing how to bring clarity to your innovation strategies through measurable insights or Key Performance Indicators (KPIs) that align with your long-term objectives.
Join us as we explore how to measure innovation capability and choose the right corporate innovation metrics for your organisation to fuel forward-thinking ventures.
How to Measure Innovation In a Company
The first thing to note about KPIs in innovation is they are incredibly complex. While it is critical for businesses to consider how they measure their innovation efforts, there is no ‘one size fits all’ approach for organisations to follow.
Measuring innovation is crucial but challenging.
The biggest issues arise when organisations use the same metrics to assess innovation strategies as those used to evaluate business as usual activity. While the ‘traditional’ KPIs have merit in many cases, trying to use these same measures to monitor innovation initiatives is like hammering square pegs into round holes.
Innovation metrics need to align with strategic objectives — something that will vary from organisation to organisation. Whether it’s company size, target audience, development stage or even industry, the KPIs you use to measure innovation rely on a combination of ever-changing factors and variables.
From a high-level perspective, we can organise innovation metrics into one of two categories:
- Input. Measuring the number of innovation enablers your business invests in. For example, input metrics can include the hours of employee time allocated to innovation exercises or the total value of investment into innovation projects.
- Output. Measuring whether your innovation investments have the desired effect. For example, two common output metrics are the number of new products released to the market in the past two-three years or the revenue generated from these products.
The most common error for established organisations is to apply the lenses of their current business to evaluate innovation projects. Innovation ventures are likely to be misunderstood or dwarfed by your existing business activity if you fail to adjust your performance metrics or align your approach with your core business objectives.
A recent study by KPMG confirmed this by highlighting how executives consider lack of strategic alignment one of the biggest barriers to implementing successful innovations.
What’s Wrong With ‘Traditional’ KPIs to Measure Innovation?
Before we explore innovation-specific KPIs, it’s important to understand why traditional metrics used to measure a business’ existing operations aren’t necessarily appropriate to evaluate the success of most innovation projects.
Traditionally, organisations focus their attention on five core KPIs:
Return on Investment (ROI)
As you would expect, ROI is a critical metric for innovation projects to justify expenditure from executives. While some projects will take longer than others to yield positive results, innovative ventures need to demonstrate opportunities for financial growth by showcasing the actual results they are generating.
However, it’s important to understand that if the initiative is in its early stages, the ROI is likely to be unknown. The project will be full of assumptions that need to be validated before you can assess its long-term success or progress into the next development phase.
The recommended approach here is to present a range, rely on existing data as much as possible to infer future performance, use proxies where appropriate, etc. But crucially you need to state your assumptions very clearly when presenting an expected ROI.
Immediately afterwards, you should present a plan of next steps focussed on validating the assumptions, one by one, starting from the riskiest one.
There are two key elements to consider when it comes to cost:
- What expenses are involved in getting an idea off the ground and testing its viability?
- How much would it cost to action and implement an innovation venture into your business model?
The biggest issue here is when intrapreneurs evoke fear in executives by proposing expenditure towards an innovation project that skips too many invalidated assumptions and focus on the second element instead of the first one.
The key to managing executive expectations and controlling cost is to request more investment as long as you are able to demonstrate that uncertainty it’s decreasing. This is aligned with our four Lean Entrepreneurship principles.
Intrapreneurs should start a new venture by running low-cost experiments to validate or disprove the riskiest assumption. That is to say that if the assumption is untrue, the venture is unlikely to develop into a successful initiative and something will have to change.
However, if the intrapreneur can prove that this assumption is true, they are then in a better position to ask for more money to validate another assumption. As this process continues, the risk systematically reduces, and executives are in a better position to bear with costs with greater confidence.
Crucially, when assessing costs related to innovation, it is important to highlight what costs you would need to bear to get to the next stage of validation.
One of the most common mistakes businesses make is to assess and compare the revenue generated by an innovation venture to its existing P&L. If organisations take this approach, the comparison will immediately dwarf any innovation efforts before they have a chance to find their feet and get off the ground.
A more appropriate measure in the early stages of an innovation venture would be growth. Whether you measure month-on-month acquisition figures for a new service, track downloads for a piece of software, or even revenue figures, demonstrating scalability and growth can signal a profit-generating potential down the road and can become a powerful tool to get executives approval for further investment.
Another common error is to compare the market share of an innovative initiative with the market share of established products or services that your organisation has developed over several years.
This is a reductive exercise that shines very little light on the potential for growth. The key here is to focus on metrics that signal growth in a new market segment that your business is yet to explore.
While your current business model may be geared towards market dominance in a certain market, investing in innovation projects could open up doors to entirely new segments that can leapfrog your business to new heights and pivot your entire business model.
If we think back to Kodak at the turn of the century — despite having the technical capacity to embrace digital photography, fear of jeopardising their lucrative film business left them with an outdated business model that was unable to keep pace with the likes of Canon, Nikon and Sony.
If organisations constantly compare the market share of innovation projects to their business as usual activities, they will come unstuck if their existing business model deteriorates, and they have failed to invest in new avenues for growth.
So, when asked to present the market share of an innovation venture, make sure to use accurate market segmentation to show how you are driving growth in a previously untapped, and hopefully sizable, new market.
Measuring the success of a new initiative using current gross margin figures is unlikely to reveal any meaningful insights.
With almost all organisations, the key to profitability is to find a business model that works and then to optimise their operations to increase gross margin. Whether it’s cutting costs, improving customer experiences to charge a higher price, or a combination of the two, improving gross margin is an iterative process that can take many years to achieve.
With this in mind, the gross margin for business as usual product and services will almost always be considerably higher than early-stage innovation ventures. Besides, new ventures are likely to be lean experiments that have been put together to validate assumptions, and not to generate immediate contribution margin.
Additionally, it’s important to note that if an innovation initiative is tech-orientated, upfront investment into development fees and set-up could yield a very high gross margin down the road if a product or service demonstrates scalability. For example, the unit costs of a subscription-based SaaS venture will tend towards zero as the number of customers increases, and despite the unit gross margin being likely lower than business as usual services, its scalability will deliver higher contribution through volumes.
Bottom line is, if asked to present gross margin figures for an innovative venture, make sure to highlight the areas of improvements you have identified to increase it in the short and medium-term and show what that gross margin would like in total when you reach the expected scale.
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What Innovation Metrics Should You Explore?
As previously mentioned, the key to successful innovation is to validate assumptions through constant experimentation and increase investment only as the risk of a venture reduces.
Instead of presenting executives with guesswork about the proposed cost of an initiative, think about systematically reducing uncertainty. Start by revising your KPIs to support your request for further investment into validating additional assumptions.
The approach we use at Studio Zao is to always start by focusing on stakeholder alignment to identify strategic transformation priorities and establish a heightened awareness of their baseline capability levels. This awareness gives organisations clarity as to where innovation is necessary, and what metrics would be valuable to support the development of initiatives that target these specific pain points or opportunities for growth. In short, we identify what success would look like, and agree on KPIs together with the execs before starting off.
Innovation-Specific KPI Examples
While there are no golden rules when it comes to selecting the right metrics for your business, here are some examples to help you align your KPIs with your strategic objectives.
Measure changes in intrapreneurial behaviour at the beginning and end of an innovation programme.
With 47% of companies citing cultural issues as the biggest obstacle to success in innovation and transformation, measuring intrapreneurial activity across your team could fuel a culture of corporate innovation and improve the execution of new initiatives.
Many organisations overlook the significance of company dynamics and cultural fit when it comes to innovation.
Whether you’re building new products from the ground-up, acquiring complementary businesses, or partnering with other organisations to access new resources, it’s important to measure intrapreneurial attitude. KPIs like employee engagement and the number of successful innovation experiments provide valuable insights to help you assess whether you’re hitting your innovation goals.
Measure the number of assumptions being validated or invalidated.
The underlying principle of lean entrepreneurship for corporate innovation is repeated experimentation to validate and invalidate assumptions. Measuring the number of tested assumptions is an important indicator of innovative behaviour across your organisation.
While there’s a temptation to focus purely on stats relating to validated assumptions, it’s also critical to acknowledge the number of invalidated hypotheses as the best intrapreneurs will reframe these ‘failures’ into positive lessons.
Measure the number of initiatives pushed to the next stage of validation.
It’s important to track how many new ideas are going through the pipeline in your company so that you can identify entrepreneurial talent, reward behaviours and individuals, spot gaps and potentially offer support/training in case innovation is lacking.
For example, Studio Zao worked with the global brand management company Pentland Group, home to Speedo, Berghaus, Mitre and Ellesse, to map out what their innovation leadership team believes the future of sport, health and fitness looks like.
After running a series of ‘challenge workshops’ to identify and prioritise the top twelve innovation initiatives they wanted to solve for consumers, we identified a crucial KPI for Pentland.
“How many proposed innovation ventures receive a green light to validate the next assumption?”
From the nine ventures proposed to Pentland’s executive board, three were selected for further development, three were assigned more time to develop their proposal, and three were rejected as the riskiest assumptions were invalidated.