KPIs – How to measure innovation?
You’ve probably heard the old saying, “you can’t manage what you don’t measure”. While there’s an element of truth in the
saying, it’s quite naive to think that everything in life, or even business, could be measured with any degree of accuracy. So, when it
comes to innovation, you would be wise to also remember another famous quote:
Not everything that can be counted counts, and not everything that counts can be counted.
So, while many aspects related to innovation are notoriously difficult to measure, there are a number of metrics, often referred
to as KPIs (key performance indicators), that are commonly used to measure innovation activities.
However, before we delve into these in more detail, let’s first cover the basics. When it comes to measuring anything abstract
and intangible, such as innovation, it’s hard to pinpoint exactly what to measure.
As such, we need to take a more systemic approach to measurement and seek to find a set of metrics that are as
representative as possible of whatever it is that we’re measuring, in this case innovation.
In general, there are two types of metrics that we can use for measuring the system: input and output.
Input metrics
Input metrics are, as the name says, used for measuring the inputs a system or activity has. They are the “I in ROI”, in other
words, investments.
In the context of innovation management, this means metrics, such as the share of R&D or innovation from your total budget,
or the number of new ideas submitted by your employees.
Input metrics are often a great starting point for measuring innovation as it’s usually quite easy to measure the activities
you’re doing. Input metrics allow you to see if you’re doing enough things, and the right things, to be able to achieve results in the first
place.
They also allow you to see if you’re moving in the direction that you want to, such as by comparing your resource allocation
towards the goals you’ve set for your portfolio. For example, by using the three horizons or the 70-20-10 models.
They, however, also have their challenges. Most importantly the fact that input doesn’t guarantee output. No matter how much
resources you pour in, you might still not see the results you want to if the quality of your activities isn’t right.
Another key challenge here is that it isn’t always straightforward to figure out what the right inputs are for getting the best
possible outputs, which is especially true for innovation.
Output metrics
The other end of the spectrum is output metrics. As you can probably guess, they measure the outputs of your system or your
activities. They represent the returns, or the “R in ROI”.
When it comes to innovation management, these can be things such as:
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Number of new (successful) products launched in the last 12 months
Revenue (or profit) from products launched in the last X years
Share of new products from the total revenue of the organization
Output metrics are a great sanity check for ensuring that your innovation initiatives actually turn into something useful, and again
for checking to see if you’re going in the right direction.
They aren’t, however, without their own share of challenges. In general, output metrics often aren’t very actionable. For example,
it’s quite difficult to know why your revenue numbers for new products aren’t matching your goals just by looking at them.
In addition, innovation activities usually take quite a long time to convert to many of the traditional output metrics, such as revenue
or profit. This, in turn, lengthens your feedback loop, which means that you might identify problems only when it’s already too late.
Types of innovation metrics
metrics.
We usually like to divide innovation metrics into five different categories, each of which can have both input and output
Four of the five categories represent each of the different aspects of innovation management, with the remaining fifth one
being focused on business and product related metrics.
We won’t go into too much detail on any of these here as you’ll find a number of solid examples in each of the five categories
from the infographic above.
Choosing the right metrics
Every organization is different, so there’s no such things as a universally applicable set of innovation metrics that would work
for everyone.
Regardless, you get what you measure, in both good and bad, which is why it’s important to choose metrics that best suit
your situation.
You get what you measure, in good and in bad.
For example, if your innovation unit focuses solely on short-term revenue goals and you hold people accountable for those goals,
people will find ways to create more revenue.
Some of them might just work harder and “do the right thing”, but others will find ways to reach the goals in less beneficial
ways, such as by shifting focus towards scaling sales and marketing prior to having a solid product-market fit for their innovation.
Here are a few tips for getting the most out of your KPIs:
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Find a good balance of input and output metrics
…and between each of the five different categories
Focus on just a few metrics at a time and set goals using just these metrics
In general, the more risk and uncertainty you face (such as when working on disruptive innovation), the more you should
focus on input metrics as the correlation to output metrics is difficult to see, which leads to worse decisions and demotivates
people
Don’t try to force the same metrics for everyone in the organization
…but make sure that the metrics align with each other and your strategy
In general, aim for metrics that are S.M.A.R.T. (Specific, Measurable, Achievable, Relevant, Time-bound)
It’s better to start with too few than too many metrics
Don’t be afraid to change the metrics once you learn more
Just try to get better every day, don’t make it into rocket science
Key challenges in innovation management
Innovation is very difficult to get right, and every organization is guaranteed to run into a number of different challenges on
their journey to become more innovative.
We’ll outline some of the more common challenges below so that you’re aware of them and can start to watch out for them in
your organization. In addition, we’ll also briefly discuss certain best practices and key success factors for maximizing your chances of
being successful.
So, without further ado, here are some of those key challenges:
Too hierarchical organization with purely top-down management
If an organization has a lot of hierarchy, and the management has a very top-down, often micro-managerial, approach to their
job, it is likely to lead to employees at the front lines becoming more passive.
You’ll recognize that this is an issue if you hear people say things like “I just work here” and “This isn’t what I get paid for”.
Innovation, by definition, is all about exceeding expectations and current limitations.
When you hear comments like that, you know that those people will, at best, match the expectations set for them, but never
exceed them. And innovation, by definition, is all about exceeding expectations and current limitations.
Culture that doesn’t support a “growth mindset”
A person has a growth mindset if they think that who they are isn’t just something that’s passed on to them, but is instead something
they can work on, for example by acquiring new skills and learning new things.
The same goes for an organizational culture. Without a culture that’s growth-oriented, the organization is simply highly unlikely to
innovate.
Poor infrastructure, lack of opportunities and resources
Without any processes, resources or infrastructure in place for implementing ideas, it will be difficult for people to achieve
impact, even if they wanted to.
For example, it’s easy to talk about Google’s 20% time being a great initiative for empowering innovation, but if you were to
simply provide the same policy in your organization, it would likely be much less effective. Your employees likely don’t have access to
the kind of tools, infrastructure, knowledge or raw data that employees at Google do.
As a manager, it’s your job to do the best you can to provide your team with the resources and capabilities they need to be
successful and the same most certainly applies for innovation.
Lack of vision and/or focus
Great innovations are often born from people having a vision for creating something that doesn’t yet exist, and the same
applies for organizations.
When your organization has a clear and compelling vision, you are much more likely to attract people who are passionate
about your mission and willing to put in the extra effort to actually come up with innovations.
However, even if you do think you have a great vision for the organization, you still need to be able to communicate it in a
manner that everyone understands and is willing to buy into.
Without focus, you are likely to spread your resources too thin and create too much overhead.
If you have a clear vision and focus, you’ll also be much better equipped for seeing those innovative ideas through to
implementation and eventually to successful innovations.
Without focus, you are likely to spread your resources too thin and to create too much (cognitive and physical) overhead. This
will lead you to be unable to execute on any of the ideas well enough to really be the best at it.
In addition, the capabilities that you have are less likely to be in line with those required to actually implement the ideas if the
ideas are all over the place.
Key success factors in innovation management
The key success factors and best practices are, for the most part, the opposite of the challenges, and a combination of many
of the points we’ve made previously in this post.
We’ll summarize the key points here, but for a more extensive take on the topic, please see our post on innovation management best
practices.
Continuous Improvement
For example, to cultivate a growth mindset, you should have a relentless focus on getting better at all the aspects related to
innovation management every day, both as an individual and as an organization.
If you improve your infrastructure and processes on a daily basis, you’ll end up with more time to focus on value creation, as
opposed to simply working on an endless TO DO list.
If you’ve also been working to improve your individual skills during this time, you’ll be much more productive with the time you
have, in addition to having more of it. This obviously puts you way ahead in the game by the time that others see the opportunity.
A mindset of continuous improvement is also tremendously helpful for cultivating a culture that's focused on getting better and
innovating.
Value creation
Many innovators are in the pursuit of chasing their vision, which can sometimes lead them to unfortunately lose sight of the
end goal: creating value for your customers.
As long as you know your market and your customers like the back of your hands, while continuing to focus on creating as
much value for them as possible with your innovation or innovations, you’re likely to go in the right direction.
The Lean Startup
In general, speed is of the essence when it comes to innovation. The Lean Startup is a great framework for a number of
reasons, but the key reason for its success is the emphasis it has on the velocity of the build-measure-learn feedback loop.
Innovation always requires you to learn at least something new, but more often than not, it takes quite a bit of learning. The
faster you get there, the more likely you are to succeed. In addition to knowledge, you should always be looking to build your
capabilities and the organizational culture to better support innovation.
Modern startups aside, let’s consider Thomas Edison and his pursuit for the first commercially feasible light bulb as an
example. He went through thousands of combinations of different materials prior to finding the one that works.
If he would’ve tried to go through the entire commercialization process for each one of those versions instead of trying to find
the ideal combination, he would’ve never made it. He would’ve run out of time and money. Instead, he knew that the critical piece was
to find the right material for the filament and he persisted until he did just that.
Allocation of resources
Any organization needs to be clear and purposeful when it comes to resource allocation, but that holds especially true for
larger organizations.
For an organization to be successful, they should identify their willingness to take risk and their desired level of returns, as
well as the timeline for that, and use them to craft a strategy that is not only in line with that background but is also realistic to achieve
with the resources available for the organization.
Once the strategy is in place, one should continuously seek to monitor progress and make sure that the resources are still
appropriately allocated.
Great culture and a world-class team
The days of heroic inventors are, for the most part, behind us. The vast majority of innovation created is these days the result
of a team of innovators.
Without the right mix of talent, along with the right culture, it’s increasingly difficult for teams to come up with innovations in
today’s increasingly complex world.
Focus
Just like lack of focus can easily be one of the key challenges preventing innovation, remaining focused is one of the key
success factors for creating them.
You are guaranteed to increase your odds of being successful when you’re focused. The reason for this is that to be better
than everyone else and do something that others can’t, you have to be willing to put in the work that others don’t.
To do something that others can’t, you have to be willing to put in the work that others don’t.
And just like in your personal life, you can’t do that on very many different fronts as an organization, at least not
simultaneously.
What next?
here”.
Now that we’ve covered all the most important aspects of innovation management, you might be wondering “where to go from
Since innovation management is such a challenging and massive area, there obviously isn’t a specific answer to this
question.
We usually recommend you start by assessing your current state and then proceed to identifying the apparent bottlenecks in
your organization’s innovation work.
Some parts of the different aspects, such as certain processes, might be easier to fix than other aspects like culture, which
will without a doubt take more time.
Once you’ve fixed the bottlenecks, it’s then time to start focusing on building your capabilities in all four of the different key
aspects we introduced in the beginning of this post.
While it’s important to fix any obvious bottlenecks you might have, don’t use all of your time to simply work on weaknesses.
Innovations are born from being exceptional and different at something, as opposed to being average at everything.
Once you’re the best in the world in whatever your domain is, and you’re still hungry to improve and get better, innovation will
inevitably follow.
This obviously takes time, so you’ll need to take it step by step. And remember that just like successful strategy work, innovation is all
about the execution.