Innovation: What are the real metrics?
The results of using that type of solution can be dramatic. Parker Hannifin, a diversified manufacturing company, for example, wanted to improve the management of its product development pipeline and chose Accolade, a software platform incorporating PPM and optimization from Sopheon. Within a year and a half, Parker had substantially reduced the number of projects in the pipeline while increasing the total value of its product portfolio fivefold. The company attributes the success in part to its ability to compare the existing projects in R&D to the company’s long-term goals.
Balanced scorecard
The Balanced Scorecard is a widely used strategic planning and measurement tool, used by about half the large companies in the United States. Its intent is to align business activities with strategic goals and to monitor the performance of those activities with respect to the goals. The Balanced Scorecard includes both financial and non-financial measures; for example, it provides metrics for measuring learning, which is particularly important in knowledge work and innovation, and for evaluating the success of business processes.
Metrics for assessing how well an organization is meeting its strategic objectives is one of the steps in the “Nine Steps to Success Framework” developed by the Balanced Scorecard Institute. In that context, innovation is defined as “the process of ideation, evaluation, selection, development and implementation of new or improved products, services or programs.” Each organization must develop its own measures for determining whether it is achieving those results.
“The most important part of developing a meaningful measure of increased innovation is taking the time to define what you mean by increased innovation,” says John McGillicuddy, communications manager and senior associate at the Balanced Scorecard Institute. “If you can state this clearly in simple language with no jargon, the most useful measure will become apparent.”
Among the suggested metrics are the number of new ideas per 100 employees, the percent that are selected for funding and the aggregate ROI for new ideas implemented. However, companies are also advised to consider data availability, potential influence over the measures and whether meaningful targets can be established.
One specific KPI suggested is the Return on Product Development Expense (RoPDE). That figure is a ratio calculated by subtracting product development expense (PDE) from gross margin or profit (GM) and dividing it by the product development expense. The Balanced Scorecard Institute advocates this measure based on the fact that it is derived from readily available accounting data and that it can be used at multiple levels—e.g., enterprise, department or even for an individual project. In addition, it incorporates business processes that impact the success of innovation.
A small percentage
Innovation cannot be measured in the same way as operational performance, and the factors that influence innovation are diverse, which poses a challenge for developing a standardized approach. Measuring activity is easier than measuring outcomes, but provides less enlightening information. Some factors, such as organizational culture and level of collaboration, are difficult to assess, and causal relationships are hard to prove.
According to a study conducted by McKinsey & Co., only 22 percent of companies attempt to use innovation performance metrics. That low figure may represent an opportunity. Companies will continue to want to attack this issue, and over time, knowledge management technologies may offer some new solutions.