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Getting a Grip on Innovation – How do you measure innovation KPI?

To measure innovation KPI is not an easy thing to do. The first issue, of course, is defining what you are measuring, and what measurement to determine whether your enterprise is innovating sufficiently or falling behind the pack?

Justin Speake, CEO of independent research firm Bloor, suggests that key performance indicators (KPIs) can be useful in measuring innovation, but with one caveat. Speake notes one should be: “Looking at KPI’s for innovative/transformation projects, not innovation itself.”

Don’t Seek to Measure Innovation Itself, Instead Measure Results of Innovation

Every business has some means to measure business outcomes. More businesses are able to track business outcomes at a level to be able to relate results to specific investments.

Resting on one’s laurels is not an option in the modern business world. Innovative/transformative projects should be nurtured at every enterprise of any size for the long-term survival of the organization.

Identifying specific KPIs for innovative projects is where the rubber hits the road.

According to Klipfolio, “A Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively a company is achieving key business objectives”.

Most organizations use KPIs at multiple levels to evaluate their success at reaching targets. The high-level KPIs focus on the overall performance of the enterprise, while the low-level KPIs focus on processes or employees.

The process of choosing KPIs is multi-factorial, and every situation is unique.  KPIs can be financial or non-financial and can relate to any aspect of business outcomes. Composite KPIs, which can’t be measured directly, are often more valuable indicators than easy-to-measure KPIs.

Understanding Innovation

You also need to have a definite idea of what you mean by “innovation” in order for your innovation. Given the reasons for “innovation” may be very different from one organization to another, unless you have defined both the objective and the results expected, you will not be using a meaningful performance measure.

Balanced Scorecard Approach

You might consider the Balanced Scorecard approach to develop your innovation KPIs.

One KPI discussed in the Balanced Scorecard approach is Return on Product Development Expense, or RoPDE. Theoretically, RoPDE is a comprehensive KPI that can adequately measure the performance of product/service innovation and development:

RoPDE = (GM – PDE) / PDE

where (GM) is Gross Margin, and (PDE) is Product Development Expense

Other Approaches

One other approach is to consider lower-level KPIs for measuring the innovation process; here you are to measure the process rather than the outcomes. Not all expert sources agree regarding the value of measuring the process, and some argue that accurately measuring the outcomes is sufficient for the purpose. But then again, what does it hurt to measure both?

One could also track the number of new ideas being considered (the raw stuff of innovation).

Another lesser-known KPI of interest is the number of different skills/experiences in the innovation team (those with similar skill-sets and experiences often come up with the same solutions). If this KPI is dropping quarter over quarter, you should start to get seriously worried.

You could also develop a KPI relating to the number of existing solution constraints being actively considered. You can think of this KPI as insurance against the so-called ivory tower innovation that never gets off the ground.

KPI should measure effectiveness

In general, your KPIs should be designed to measure the effectiveness of innovation, that is, whether the innovation is actually delivering anything you can use or not.

While it is true that innovation is often spontaneous and its form cannot be predicted, a business that plans to grow must manage innovation, and that means finding a reasonably accurate method to measure it.

Last but not least, remember that the trick in managing innovation is encouraging constant evolution among your employees without stifling their creativity.